High Yield at 7%: Why Federated Hermes and UBP Are Not Buying
Income holds the case together. Spreads, well below average, do not.
That tension is not abstract for me right now. I started a search for a client this week: finding the right high yield fund, active or passive. The first thing I did was not look at funds, it was look at what the market itself thinks of the asset class. What follows is that answer.
US high yield spreads stand at 278 basis points, tighter than on the day the Strait of Hormuz closed. That is the paradox 68 sources could not resolve this month.
The Asset Allocation Consensus (AAC) distils the positioning of 68 professional sources worldwide into a single directional signal each month. For high yield, the outcome is neutral: 17.9% overweight, 46.4% neutral, 35.7% underweight. That split is not indecision, it is a market facing two equally weighted arguments with nowhere to go.
The income case is straightforward. All-in yields of 7.02%, with BB-rated paper at 5.97% and single-B at 7.28%, offer return potential that has been largely unavailable for most of the past decade. Default rates sit at 1.28%, below the historical average of 1.42%. Duration of 3.0 years versus 6.8 years for investment grade credit makes high yield structurally less exposed to further rate increases. In the current environment, where income is the primary return driver rather than spread compression, the buy-and-hold case holds.
The counterargument is equally strong, and it is about price, not quality. US spreads of 278 basis points sit 79 basis points below the five-year average of 357 basis points. For context: at the start of March, those same spreads stood at 303 basis points. Since then, markets have priced more risk into the economy and less risk into high yield. That divergence is what keeps SEB and Schroders underweight: the asymmetry versus equities is negative, and the risk-return profile is insufficient given the combination of growth risk, higher input costs, and tightening refinancing conditions.
Federated Hermes: spreads do not compensate for the risk
Federated Hermes, winner of the Fixed Income Award at the Asset Allocation Awards, is underweight high yield. The reasoning is consistent and unchanged since March: spreads are tighter than pre-conflict levels, the Federal Reserve is on hold, stress in leveraged finance, particularly private credit, continues to build, and redemption pressure adds a structural drag. The position has not moved in four months. That matters: this is not a reactive call but a considered view on risk compensation.
UBP: adding high yield is a bet we are not prepared to make
Union Bancaire Privée (UBP), winner of the Overall Award, arrives at the same conclusion from a different angle. In March, UBP reduced its exposure to high yield as part of a broader fixed income derisking, shortening duration from 4.5 to 3.5 years. The June House View maintains that stance: duration neutral at 4.0 years across USD, EUR, and GBP portfolios. The near-term distribution is binary. A signed agreement on the Strait of Hormuz pulls oil and yields lower and drives a risk-on move. A breakdown keeps the inflation backdrop intact and central banks under pressure to hike. Adding high yield at 278 basis points of spread is a bet on the first scenario. A bet UBP is not prepared to make.
What to watch
A reopening of the Strait of Hormuz is the primary circuit breaker. Lower oil prices, falling yields, and improved sentiment could shift the neutral consensus toward overweight. In the other direction, a further deterioration in private credit stress, or a rise in default rates toward the historical average, validates the underweight camp.
New to this? High yield bonds pay more than government bonds because they carry more risk, and that extra income is now higher than it has been in years. The question dividing professional investors: is 7% return enough when the safety margin built into prices is at a five-year low?