2026 Outlook: High yield

Summary

• Carry, not compression, will drive returns in 2026. With spreads already near post-crisis lows, high yield becomes a steady income story rather than a directional one.

• Yields remain appealing despite tight spreads. Government rates have stayed higher than expected, and new issuance at elevated coupons has rebuilt the income opportunity for investors.

• Macro risks sit on both sides. Too little stimulus risks recession and spread widening; too much risks reigniting inflation and limiting the rate-cutting cycle.

• Private credit stress is a new swing factor. Early cracks in private markets could spill over into public high yield, triggering spread decompression and pressure on lower-quality issuers.

• Quality bias and coupon are central to positioning. Our portfolios emphasise higher-quality BB/B exposure and a higher coupon than the benchmark, while selectively targeting cyclical recovery and LBO opportunities.

Carry takes the lead in 2026

After two years of strong performance, global high yield enters 2026 at an interesting juncture. The recession widely expected in 2023–24 never arrived: US consumers remained resilient, the AI investment cycle gathered pace, and rate cuts that began in late 2024 supported a soft landing. Those dynamics helped drive meaningful spread compression through 2023–25, pushing valuations towards the lower end of their post-crisis ranges. In other words, the market has already priced out a significant portion of the downside risk that investors once feared.

A market where carry matters more than direction

That leaves today’s opportunity centred less on further spread tightening and more on the strength of carry. While spreads are historically tight, overall yields remain appealing because government rates have not fallen as quickly as expected. Companies have been issuing at much higher coupons over the past two years, rebuilding the income available to investors. Against this backdrop, we think high yield looks set for a year defined by steady income rather than significant directional moves – what we view as a classic ‘carry year’, with potential for mid-to-high single-digit total returns if the macro environment holds.

Stimulus, cycles and a narrowly balanced macro backdrop

The broader outlook hinges on whether the soft landing is the start of a new cycle or merely the late stages of the previous one. Our base case is constructive: both monetary and fiscal stimulus should support US and global growth into 2026–27. Financial conditions are loose, interest rates have moved meaningfully lower, and typical high yield sectors – industrial and service-oriented companies – should be able to navigate a shallow-growth but stable backdrop.

But this narrative comes with two potential risks. The first is that stimulus arrives too late. Labour markets have softened, and policy operates with lags. If activity weakens further and recession probabilities rise, high yield spreads could widen meaningfully.

The opposing risk is that stimulus proves too powerful and reignites inflation. With a US political cycle approaching and large spending plans requiring cheaper funding, the pressure to push rates lower is strong. But if inflation becomes sticky, the cutting cycle could be shallower than expected, keeping high yield in a range-bound, carry-plus environment.

Private credit as a new swing factor

There’s also a wildcard risk factor that sits outside traditional macro considerations. Early cracks have appeared in private credit, where underwriting standards appear to have been looser and transparency lower than in public markets. Large mark-downs or fund restructurings could spill over into public high yield, triggering spread decompression: higher-quality issuers widening modestly, lower-quality issuers widening sharply, as has already begun in recent weeks.

Where surprises may come from: M&A and LBO activity

There are also potential upside surprises. M&A and leveraged buyout (LBO) activity is re-emerging, helped by lower valuations, easier financing and ongoing deregulation. For credit investors, change-of-control events can create opportunities in both directions: bonds trading below par can reprice higher, while those above par may fall. We expect this to be a more prominent theme over the next year.

Positioning for resilience and meaningful coupon income

Given this backdrop, we are positioning our portfolios to make the most of the carry environment while managing downside asymmetry. The focus is on earning higher income than the benchmark – our coupon is around 6.9% versus 6.3% – achieved through disciplined security selection and a preference for the most attractive coupons relative to price.

At the same time, we maintain a clear tilt towards higher-quality credit. While CCCs delivered exceptional returns in 2023–24, that segment is now more vulnerable: economic growth is insufficient for many issuers to ‘grow into’ their capital structures, and higher interest costs continue to squeeze cash generation. We therefore remain underweight lower-quality credit and overweight BBs and stronger single-Bs, which offer a more resilient income profile in a sideways market.

Selective opportunities across sectors and regions

Selectivity remains essential. We see opportunities building in cyclical areas, such as chemicals and building materials, particularly if the cycle turns up. We continue to monitor potential LBO and recovery candidates.

Regionally, we retain a tilt towards the US, where deregulation and steadier growth provide a clearer path for earnings. Europe offers pockets of value – including in selected peripheral banks – but the broader macro picture remains more varied and country-specific.

A year where carry does the heavy lifting

Overall, we think 2026 is shaping up as a year in which high yield earns its name: not through dramatic spread moves, but through the strength of the coupon. If the soft-landing scenario holds – and if policy stimulus supports activity without reigniting inflation – the asset class should deliver solid carry. 

Return to 2026 Outlook