The Fed: Q4 2024
High Yield Fixed Income: High Yield Closes the Books on a Banner Year
- Economic growth helps to offset higher borrowing costs.
- Fundamentals bolstered by financial resiliency.
- Asset diversity is important during periods of volatility.
The high yield (HY) credit market saw robust returns in 2024, handily outperforming investment grade peers.* A combination of stable corporate fundamentals, elevated yields and evolving investor sentiment were key contributors. Despite the whipsaw in the U.S. Treasury curve that saw the 10-year bond yield rise by 70 bps from the beginning of 2024, higher borrowing costs did not weigh on the market, as businesses were able to maintain their profitability. Coupled with lower-than-expected default rates, the Opportunistic Income sector delivered a positive total return for its investors. Shifting gears toward floating rate securities, notwithstanding three rate cuts by the Fed totaling 100 bps, U.S. and European bank loans outpaced high yield bonds, benefiting from demand for floating rate assets due to below-trend distressed borrowers and higher yields.
Chart 1: Elevated Yields Close Out 2024
Source: Bloomberg, as of December 31, 2024.
Past performance is no guarantee of future results.
Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.
Information is subject to change and is not a guarantee of future results.
* Index used: Bloomberg Municipal High Yield Bond Index.
U.S. corporate HY, municipal HY and Emerging Markets (EM) debt market segments were buoyed by improved credit health and technical support, such as net demand for bonds. U.S. corporate HY issuers undertook a series of actions to strengthen their credit positions, for example, maturity extensions and debt reductions. Further, back-half 2024 outperformance greatly extended price gains for the lowest cohort of the space (i.e., CCC-rated securities), which rallied, in part because of the election result, by approximately 15%. With strong issuance absorbed by positive fund flows and favorable credit conditions, spreads (i.e., risk compensation) tightened considerably toward their lowest levels for the recent cycle. Similarly, HY municipals, which include corporate-like issues, like industrial development bonds, benefited from similar dynamics despite the longer-duration nature of this market (i.e., bond maturities tend to be long term and are more sensitive to interest rate moves).
The rebound in EM corporate HY bonds was a surprising story as stronger commodity prices and broader economic growth enhanced their return profile. Though geopolitical risks and a stronger U.S. dollar remained a concern, elevated yields and discounted prices were attractive to investors in 2024. Floating rate asset classes, such as Bank Loans, Structured Credit, and Private Credit, benefited investors this year, and we continue to see potential in 2025, with slightly lower expected returns due to a contraction in base rates.
Moving forward, we are closely monitoring ever-contracting spreads but appreciate the absolute yields within the HY credit markets. Many of the same themes that played out during 2024 should extend into next year, with some potential volatility along the way. Access to balance sheet resources and lower default rates are accompanied by currently accommodative central bank policy. However, should margin expansion moderate as the economy slows and M&A activity accelerates, this could lead to a weakening in spreads. Further downside risks could develop should overall rates increase appreciably. To counter these potential headwinds, investors should maintain a diversified approach with exposure to different asset classes to help offset future market swings.
Chart 2: High Yield 4Q2024 and Annual Total Return
Source: Bloomberg, as of December 31, 2024.
Indexes are unmanaged and do not reflect a deduction for fees or expenses.
Information is subject to change and is not a guarantee of future results.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification may not protect against market risk or loss. Past performance is no guarantee of future performance.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junkbond. When interest rates rise, bond prices fall.
Bloomberg risk is the weighted average risk of total volatilities for all portfolio holdings. Total Volatility per holding in Bloomberg is ex-ante (predicted) volatility that is based on the Bloomberg factor model.
Municipal securities. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible. Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases and changes in the credit ratings.
City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank is a subsidiary of the Royal Bank of Canada.
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Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.
Bloomberg Municipal Bond Muni Short (1-5) Index 1-5 year maturities of the US Municipal bond index.
The Bloomberg Muni Intermediate Index is an unmanaged index that tracks the performance of intermediate US government securities.
The Bloomberg US Government/Credit 1-5 Year Index tracks USD-denominated, investment grade, fixed-rate bonds, including treasuries, government-related and corporate issues. The Index includes securities with at least one, and up to, but not including, five years until final maturity.
The taxable Intermediate Government/Credit Credit Index measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with a maturity greater than 1 year and less than 10 years.
The Morningstar LSTA US Leveraged Loan 100 Index is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans. It represents the 100 largest and most liquid issues in the institutional loan universe and is a cornerstone for measuring the pulse of the leveraged loan market.
The Bloomberg US High Corporate Bond Yield to Worst Index represents the semi-annual yield to worst of the ICE BofA US High Yield Index, which tracks the performance of US dollar denominated below investment grade rated corporate debt publicly issued in the US domestic market.
The ICE BofA High Yield Emerging Markets Corporate Plus Index is a subset of the ICE BofA Emerging Markets Corporate Plus Index, which includes only securities rated BB1 or lower.
The Palmer Square CLO Debt Index is a rules-based observable pricing and total return index for collateralized loan obligation (CLO) debt for sale in the United States.
Yield to worst (YTW) is the lowest yield that can be realized by either calling or putting on one of the available call/put dates, or holding a bond to maturity.
Indexes are unmanaged and do not reflect a deduction for fees or expenses. Investors cannot invest directly in an index.
Definitions
Yield to Worst (YTW) is the lower of the yield to maturity or the yield to call. It is essentially the lowest potential rate of return for a bond, excluding delinquency or default.
P/E Ratio: The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).
The 4P analysis is a proprietary framework for global equity allocation. Country rankings are derived from a subjective metrics system that combines the economic data for such countries with other factors including fiscal policies, demographics, innovative growth and corporate growth. These rankings are subjective and may be derived from data that contain inherent limitations. MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.
The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
City National Rochdale Proprietary Quality Ranking formula: 40% Dupont Quality (return on equity adjusted by debt levels), 15% Earnings Stability (volatility of earnings), 15% Revenue Stability (volatility of revenue), 15% Cash Earnings Quality (cash flow vs. net income of company) 15% Balance Sheet Quality (fundamental strength of balance sheet).
*Source: City National Rochdale proprietary ranking system utilizing MSCI and FactSet data. **Rank is a percentile
ranking approach whereby 100 is the highest possible score and 1 is the lowest. The City National Rochdale Core compares the weighted average holdings of the strategy to the companies in the S&P 500 on a sector basis. As of September 30, 2022. City National Rochdale proprietary ranking system utilizing MSCI and FactSet data.
BPS: A basis point (BPS) is used to indicate changes in the interest rates of a financial instrument. Basis points are typically expressed with the abbreviations “bp,” “bps,” or “bips.”
A consensus estimate is a forecast of a public company’s projected earnings based on the combined estimates of all equity analysts that cover the stock.
Bureau of Labor Statistics(BLS): The BLS is a federal agency that collects and disseminates important information about labor, wages, prices, and productivity.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
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