Payden & Rygel: High yield bonds 2026
We believe security selection is going to be critical in 2026 for high yield bonds.
We remain positive on high yield while acknowledging relatively tight valuations and asymmetric risk to the downside. Therefore, we believe security selection is going to be critical in 2026, particularly avoiding underperformers.
The reasons for our high yield market optimism:
- Fundamentals remain strong. Corporate performance has been resilient, as issuers continue to report healthy earnings growth. Furthermore, disciplined management teams have maintained moderate leverage and strong interest coverage.
- Default risk remains low based on corporate credit fundamentals. Forward-looking default expectations are the most reliable predictor of long-term spread behavior, and we have no reason to believe we’ll see a spike in defaults anytime soon, which should (and has) put a damper on spread volatility overall.
- The technical backdrop is strong with robust demand and light supply. Most high yield investors buy based on yield, not spread, and elevated yields continue to attract new investment. Meanwhile, the market is undersupplied again for the 9th time in the last 10 years. This dynamic should keep spreads from materially widening without a significant change in the macro backdrop.
- Expected returns look solid based on yields. Historically, starting yield levels have been the best predictor of forward-looking returns, as there is a 0.93 correlation between yield and next-five-year annualized return.