Dec 10 (Reuters) - A lower rung of U.S. junk bonds is set to deliver its best returns in eight years in 2024, underscoring a significantly higher risk-return payoff for investors dabbling in speculative assets this year.
Returns on CC-rated debt, two rungs above D - meaning in default, have surged nearly 48% this year, a far cry from 83% in 2016 but nearly three times higher than last year, according to data from Morningstar Direct.
In comparison, investment-grade credit has generated returns between 3% and 5% this year, while other junk bond tiers have yielded returns between 7% and 15%.
Investment-grade bonds are generally perceived to be safer, but their lower risk and greater stability mean lower returns than often illiquid high-yield bonds.
This year's outperformance by high-yield bonds has been driven by stronger corporate profitability and a soft economic landing that has kept default rates near historic lows and supported strong recovery rates, Bob Michele, global head of fixed income at JPMorgan Asset Management, said.
"It has been a very good year for credit," Michele told the Reuters Global Markets Forum, opens new tab (GMF).
"Areas that stood out to us were the performance of bank debt, especially AT1, and the performance of high yield," he added. AT1, or additional tier one bonds, are designed to act as shock absorbers that can be written off or converted into equity if a bank's capital levels fall below a certain threshold, providing a cushion at times of market turmoil.
Despite record-tight spreads in corporate bond markets, asset managers remain bullish on U.S. fixed income, bolstered by President-elect Donald Trump's election victory and the Republicans' control of the House and Senate, which are expected to reinforce pro-growth policies and further support risk assets.
"Spreads across risky assets are extremely tight and worth a second look for investors, but the favorable growth and labor market environment have continued to make it difficult for investors to step away," Gennadiy Goldberg, U.S. rates strategist at TD Securities, told the GMF.
The ICE BofA high-yield index, which tracks the performance of junk bonds (.MERH0A0), opens new tab, has hit record highs above 1,736 this week and is heading for a rise of 9.7% in 2024.
(Join GMF, a chat room hosted on LSEG Messenger, for live interviews: https://lseg.group/3KFHrhe, opens new tab)
Reporting by Mehnaz Yasmin in Bengaluru. Editing by Amanda Cooper and Mark Potter
