Today, nearly 60% of the US high yield corporate market is rated BB
Source: US high yield Index is represented by the ICE BofA High Yield Constrained Index, January 31, 1997–June 30, 2026.
Fixed income allocations have increased significantly in recent years, and they keep increasing. In fact, at the time of writing, inflows into this segment of the market have increased more than twice as quickly as they did last year.1 We understand why: income opportunities are compelling and credit fundamentals are robust.
This said, we believe there’s an area of the fixed income market investors are underutilizing in modern portfolio construction: high yield bonds. This asset class may offer several benefits:
Potential for equity-like performance
Potentially attractive risk-adjusted returns
Lower volatility than traditional equity
Meaningful income potential
Low correlation to traditional fixed income
Given these key features and the current climate of historically attractive all-in yields, we explore why high yield may deserve to be a core allocation in investors’ portfolios.
Since the beginning of the 21st century, high yield bonds have delivered long-term performance similar to equities, but with about 70% correlation to stocks.2 This means high yield bonds can help investors capture meaningful growth without the full downside of equity-only exposure.
This type of relatively balanced risk-return profile may be particularly attractive in today’s environment, where there is much potential upside to be captured, because recession risk is low, corporate earnings are strong, and the labor market is solid. Still, there are potential downside risks to be mindful of, like equity market concentration.
Portfolio diversification has often been touted as “the only free lunch in investing.” But it hasn’t mattered much for investors in recent years, as US equity markets have marched up and up on the back of a few mega-cap highfliers.
But, with equity market concentration levels at an all-time high and macroeconomic uncertainties looming, portfolios may be getting hungry for diversification once more. And the classic 60% equity–40% fixed income approach to diversification that investors relied on for so long might not cut it anymore, because these broad asset classes have become increasingly correlated.
Today, high yield bonds offer something increasingly rare: a differentiated return stream. With a low 20-year correlation to Treasurys, high yield can provide genuine portfolio diversification benefits that complement both equity and other fixed income allocations. High yield can help add yield and growth potential without abandoning the balanced approach that has served wealth portfolios for generations.
Despite these potential benefits, some investors are reluctant to incorporate high yield bonds in their fixed income allocations. Why? For many years, high yield issues were regarded as “junk bonds” – high-risk, speculative, possibly inferior choices. This still colors some perceptions today, but the reality is, while still subject to higher default rates than investment grade bonds, the high yield market of 2026 bears little resemblance to the “junk era” of days gone by.
In the past 15 years, this market has undergone a fundamental transformation. Credit quality has improved dramatically (Figure 1). We’re in a historically low default environment that supports favorable risk-reward dynamics, and the market is responding accordingly. Now, high yield is a $1.5 trillion market spanning more than 850 issuers.3
Today, high yield bond issuers aren’t distressed borrowers; they're businesses with proven models seeking flexible capital structures. The global financial crisis inspired the change. After the crisis, 0% interest rates were put in place, fundamentally upgrading the asset class, to lasting effect.
And with corporate bond issuance rebounding toward the high end of its historical range, driven by refinancing, M&A, and artificial intelligence (AI)-related capital expenditure, the opportunity set has rarely been deeper or more diverse.
High yield bonds rank in the top quartile for income production among major asset classes. Their regular coupon payments provide consistent cash flow and portfolio income stability, a feature that resonates strongly in retirement planning and wealth preservation strategies.
With the US Federal Reserve effectively constrained and rate cuts having given way to expectations of rate stability or hikes, locking in attractive high yield spreads today may position portfolios to benefit from both current income and potential price appreciation if rates eventually ease. High yield bonds can help investors seek income and lock in yields without reaching into illiquid alternatives, which have different risks and capacity constraints.
For portfolios seeking to balance income generation, growth potential, and genuine diversification, high yield bonds offer a compelling value proposition. In our view, the asset class should be regarded as a core allocation, not a niche play. An active approach may be useful here. Security selection is becoming more important than broad beta exposure, and experienced, active high yield managers may be better equipped to navigate idiosyncratic risks while maintaining income stability and seeking returns.
In a world where traditional fixed income yields remain modest and equity valuations are stretched, high yield deserves consideration as more than just a tactical trade. It's a strategic allocation for modern wealth portfolios looking to seize the moment for income.
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Past performance does not guarantee future results. Diversification may not protect against market risk.
● Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling. ● Fixed income securities are subject to credit risk, which is the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower expects to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk. ● Fixed income securities are also subject to interest rate risk, which is the risk that the prices of fixed income securities will increase as interest rates fall and decrease as interest rates rise. Interest rate changes are influenced by a number of factors, such as government policy, monetary policy, inflation expectations, and the supply and demand of securities. Fixed income securities with longer maturities or duration generally are more sensitive to interest rate changes. ● Fixed income securities may also be subject to prepayment risk, which is the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate. ● High yield securities (“junk bonds”) are subject to reduced creditworthiness of issuers, increased risk of default, and a more limited and less liquid secondary market. High yield securities may also be subject to greater price volatility and risk of loss of income and principal than higher-rated securities
The ICE BofA US High Yield Constrained Index tracks the performance of US dollar-denominated high yield corporate debt publicly issued in the US domestic market, but caps individual issuer exposure at 2% of the benchmark. The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value and is often used to represent performance of the US stock market. The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. The MSCI World Index represents large- and mid-cap stocks across 23 developed market countries worldwide. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
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