The good news is that over 50% of the fixed income market is now rated BB—the highest in history. Historically, BB defaults are extremely rare, which means default rates should not spike as high as they did during the 2008–2009 global financial crisis.
There is also anticipation that fallen angels will change the high yield sector.
“We’re seeing a new cohort of very high-quality, iconic industry leaders in some of these troubled sectors fall into the high yield market. And it's created some good opportunities,” Vaselkiv says.
Treasury yields, meanwhile, are at extreme lows, and perceived safe-haven sectors like AAA rated municipal bonds and high-quality securitized sectors are expensive. By driving interest rates back down toward their historic lows, central banks are encouraging investors to move out of the risk spectrum into areas like corporate credit.
However, investors also need to be aware of the potential for a rebound in yields if the recovery proves faster than expected and/or a vaccine becomes widely available.
“The Fed will do all it can to keep rates low, but yields potentially could move higher,” Vaselkiv says. “Investors should carefully consider this risk.”