Improved Credit Quality of the US High Yield Bond Market
April 2026
By Mark Rigazio, Managing Director – Head of Research, High Yield & Bank Loans; John Flynn, CFA, Senior Managing Director – Business Development & Marketing
Exposure to the U.S. High Yield Bond Market can play a valuable role in certain diversified asset allocation strategies. Today, high yield bonds offer an attractive means to increase spread and yield using an index that has improved meaningfully in credit quality since the Great Financial Crisis. Just prior to Lehman’s bankruptcy filing in September 2008, we found the high yield market was comprised of approximately 20% of CCC bonds with BB and B rated issues representing approximately 35% and 45% of the market, respectively. Over the past couple of decades, we are observing the high yield bond market has transitioned to higher quality issuance with BB bonds representing approximately 60% of the market today, while B and CCC bonds declined to approximately 30% and 10%, respectively.
Figure 1: U.S. High Yield Market Size by Credit Rating
Source: BofA Global Research, ICE Data Indices, LCD
Market Outlook and Opportunity
The BB-B component of the high yield market has provided attractive absolute returns, comparable volatility, and ultimately higher risk adjusted returns vs. the investment grade corporate bond market and the broader aggregate bond index.
While the reasons for the improved quality are numerous, one sector worth noting that has contributed to the improvement in quality is Energy. Energy credits, which account for over 10% of the high yield market, have historically operated with an elevated level of risk. Post the energy default cycle in the 2014/2015 timeframe, issuers have operated with more financial discipline and today we are seeing the sector is comprised of approximately two-thirds of BB rated bonds, 30% B rated and less than 5% CCC. Other reasons commonly cited for the improvement in credit quality of the high yield bond market are that riskier issuers have migrated to the broadly syndicated leverage loan and private credit markets. Regardless of the reasons, the high yield market is well-positioned from a risk perspective.
It is important to recognize that issuers may continue to default, particularly during periods of economic stress. However, given the overall improvement in credit quality and it’s decoupling from the leveraged loan market, it’s reasonable to think default expectations should be set lower and the high yield bond market should continue to be an asset class where investors can expect to capture higher income and risk adjusted returns in the traditional public bond markets.
Figure 2 - Performance Comparison Across Fixed Income Sectors (10-year)
|
Index |
Annualized Return - 10 YR (12/2025) |
Annualized Standard Deviation - 10 YR (12/2025) |
Sharpe Ratio - 10 Years (12/2025) |
|
Bloomberg US Aggregate |
2.01 |
5.05 |
-0.04 |
|
Bloomberg US Corporate Investment Grade |
3.27 |
6.94 |
0.15 |
|
ICE BofAML BB-B US High Yield |
6.07 |
7.03 |
0.55 |
Source: eVestment Alliance as of December 31, 2025
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