The US high-yield bond market has moved up in quality. We believe healthy fundamental and technical factors in 2026 will continue to underpin it in 2026. Carry should again drive returns, but there is likely to be more variety in returns across sectors, credit ratings and bond issuers, writes Jack Stephenson, Investment Specialist for US High-Yield.
In 2025, the pendulum swung significantly on the US macro environment, but the market eventually shrugged off any concerns about tariffs, the labour market and the longest government shutdown in history to generate an 8.5% annual return.1
This sets the scene for what is likely to be one of the main talking points for credit investors in 2026 – to what extent does widening dispersion of returns across segments reflect a deteriorating credit market? In this healthy coupon-clipping environment with credit spreads seemingly stuck at close to all-time lows, should we care?
Despite all the geopolitical noise, the US economy started 2026 on a relatively sound footing. We expect growth to be slower over the next couple of years, but to still be underpinned by resilient fundamentals. That is supportive of the ability of US high-yield bond issuers to grow earnings.
Although US policy rates looks likely to be on hold for now, above-target inflation could hinder the ability of the Federal Reserve to resume rate cuts when new Chair Kevin Warsh takes office.
We saw during the recent Greenland episode that import tariffs are still a favoured mechanism to generate bargaining power, while the pass-through of existing tariffs, falling labour supply from tighter immigration controls, and AI-related exuberance should ensure inflation is sticky. Nevertheless, the market is still pricing rate cuts in the second half of the year.
If realised, this would support all fixed income markets.
Spreads – A cause for concern or fairly priced?
In January, credit spreads were peculiarly resilient despite rising geopolitical tensions and the renewed threat of US tariffs on key European trading partners. Are investors looking through some of the rhetoric out of the US administration, or is something else – potentially structural – at play?
While spreads are clearly not cheap by any historical comparison, when considering the longer-term trend towards a much better-quality high-yield bond market, we should think about spreads increasingly on a ‘quality-adjusted’ basis.
Investors might still see the high-yield market as the ‘junk bond’ market, but over the last 15 years, the market has gradually moved up in quality. Today, we have 57% BB rated bonds compared to 37% before the global financial crisis and 12% CCCs compared to 16% before the global financial crisis2.
Also, secured bond issuance has grown in the past few years as issuers sought to minimise interest expense, creating a higher floor to sell-offs. Despite being a naturally shorter maturity part of fixed income, the US high-yield market’s duration is now near record lows due to bonds staying outstanding longer as many companies have been able to wait for rates to come down before refinancing.
Some $280bn of rising stars in 2022-24 took out some of the more rates-sensitive part of the market, which has not been replaced by fallen angels (about $40bn over the same time period).3 So, structurally, the market should justify a tighter spread level and this should lead to a lower ceiling in spreads when we see sell-offs. We saw this during last April’s ‘Liberation Day’.
Current fundamental and technical dynamics are supporting tight spreads, with defaults still below long-term averages. We have been coming off record-high levels of interest coverage and record-low levels of leverage for US high yield issuers, with mild deterioration in both metrics as companies have refinanced at higher rates, but both levels still look manageable to us.
Maturities continue to be pushed out, with 70% of 2025’s gross new issuance used for refinancing purposes as companies took advantage of declining yields.4 While we’ve seen a pick-up in gross new issuance, net supply remains low and strong demand has continued into January. Investors responded to these positive dynamics with $18bn of net mutual fund flows into US high-yield in 2025 – the highest since 20205.
This backdrop points to spreads remaining contained, although we expect that spreads may finish 2026 in a slightly wider trading range than today with increased bifurcation across sectors and ratings, driven by volatility related to AI-disruption risk and further decompression in the lower rated part of the market.
Where are the opportunities?
With uncertainty over the long-end of the curve due to fiscal pressures and potential contagion from the situation with Japanese long-end yields, we believe that shorter duration asset classes such as high-yield offer a natural buffer.
In particular, we continue to find potentially attractive risk/reward opportunities. Capital availability to address near-term maturities has rarely been higher, with financial solutions offered even to distressed companies. In our view, ‘security by maturity’ persists in many capital structures due to the abundant supply of capital available in credit markets. Short duration protects against spread volatility, provides liquidity, and offers an appealing yield capture versus full duration counterparts.
While there are plenty of high-yield bonds still trading at below par, there is also a good amount of bonds above par that are trading to short call dates, generating a lower yield-to-worst. Together with our analyst team, we aim to identify bonds that we believe will stay out longer than is priced, thereby generating a higher realised return than the yield-to-worst today (i.e. ‘extension trades’).
On the primary market, banks expect issuance to rise this year, driven by increased merger, acquisition and buyout activity and AI-related issuance, with some forecasts pointing towards at least $15-20 billion of AI-related issuance of US high-yield bonds to fund datacentre buildouts6.
Relative to investment-grade, however, we expect high-yield AI-related issuance to remain muted for now given the comparably higher cost of capital and more flexible options available to fund deals in private credit.
Recent multiple compression in equity tech/software markets spilling over into public and private credit markets is both a notable risk and opportunity for the US high-yield market, and leveraged finance generally in 2026. We expect the market to start to differentiate between potential winners and losers; the fundamentals will start to drive more dispersion in the sector over time, creating opportunities.
For higher return-seeking strategies, we seek to identify the best ideas in the higher yielding segment, although we are defensively positioned relative to history, poised to add risk on any market weakness.
Finally, it’s worth remembering that there are different ways to use US high-yield, not only to reflect different outlooks and risk appetites, but also to complement other asset classes.
One of the major benefits of the US high-yield market is diversification: being able to produce equity-like returns, but with lower volatility, and a shorter maturity than investment-grade. High-yield bonds can complement high-quality fixed income and can thus play a unique role in a diversified portfolio.
[1] Source: ICE BofA US High Yield as of 31 December 2025
[2] Source: BofA Research as of 31 January 2026
[3] Source: JPMorgan Research Credit Strategy Weekly as of 31 December 2025
[4] Source: JPMorgan Research Credit Strategy Weekly as of 31 December 2025
[5] Source: JPMorgan, High Yield Bond and Leveraged Loan Market Monitor as of December 31, 2025
[6] Source: JPMorgan, 2026 High Yield Bond and Leveraged Loan Outlook
