Since Covid-19 disrupted markets in early 2020, high yield has been one of the best-performing fixed income sectors. In fact, it has significantly outpaced the Bloomberg US Aggregate Index (and Global Aggregate Index), US corporate bonds, emerging markets bonds and securitised credit — and by a wide margin.

Investors often use spreads as an indicator of when to invest in the sector. But looking at data over the longer term, we believe factors such as yield to worst, earnings growth among the constituents of the S&P 500 and average credit quality can help provide a more accurate view of potential high-yield returns. 

Although natural for investors to be concerned with tight current spreads in the sector, trying to market-time an allocation to high yield may be much more difficult and costly than investors expect. 

Looking to history again, we believe the high-yield market has the potential to remain strong and could serve many investors well as a permanent portfolio allocation. Ultimately, high yield can potentially provide strong current income and returns over many market cycles — and most often with lower volatility than equities. 

Here are five factors investors could consider when thinking about high yield.