Market View I High Yield Monthly Update
Views from our High Yield investment boutique, NCRAM
October 2, 2026
David Crall, CFA
CEO & CIO, Nomura Corporate Research and Asset Management Inc.
US High Yield
The US high yield market returned -2.49% in September, dropping the YTD total return to 0.04%, according to the ICE BofA US High Yield Constrained Index (HUC0). US high yield succumbed to the massive repricing in the US Treasury market, as the yield on the 10-year Treasury increased by 54 bps to 5.29%, and the yield on the 5-year Treasury increased by 59 bps to 5.09%. We believe Treasuries have repriced primarily due to the growth effects of the AI boom – as the hyperscalers continue to report that the demand for computing power exceeds the supply, they are planning to increase their investment spending for the next few years. As this spending underpins the overall economy, the market has recognized that the Fed will need to adjust rates to steer inflation back toward 2%, and rates will be “higher for longer.” During September, the market was expecting two rate hikes by the end of 2027, ending at 4% to 4.25%. At the end of September, after one hike during the month, expectations were adjusted to four more hikes by the end of 2027, ending at 4.75% to 5%. Views that Fed Chair Warsh would be reluctant to raise rates have been set aside, as his language tends to be hawkish. Notably, the backup in rates is a global phenomenon, as the AI boom competes for capital all around the world.
In the face of rising rates, the S&P 500 was relatively stable, supported by the AI-linked parts of the market, while segments of the equity market with more interest rate sensitivity were down, such as the Russell 2000 (down 5%). Within high yield, spreads widened by 49 bps, and CCCs were down the most, on the same logic that overall growth will be supported by AI, but higher rates may slow parts of the economy. Heavy supply also weighed on spreads. September saw total issuance of $51.7bn, including $36.3bn net new supply, an all-time high for monthly net volume. The best performing sectors in the market, with the least decline, included Entertainment, Publishing, and Technology, while the weakest sectors were Cable TV, Broadcasting, and Insurance. The US high yield market ended the month with a yield of 8.30% and spread of 312.
Looking forward, we believe the yield increases across fixed income have created an attractive buying opportunity in fixed income in general and US high yield in particular. The AI boom has pushed up yields, but this theme could moderate in 2027 and suppress yields if demand for AI falters, and there are other sources of possible economic uncertainty that could lead investors back to Treasuries. We think the advent of the chatbot Muse, which is cutting costs for consumers, points to the deflationary impacts of AI which could help limit Fed hikes. With regard to US high yield, although higher rates will slow certain sectors, the overall market has a high average rating and defaults should remain muted, while the 8.3% yield provides solid income to support an attractive return for the risk.
Global High Yield
The global high yield market returned -2.26% in September, bringing the YTD return to 0.73%, as measured by the ICE BofA Global High Yield Index (HW00), in USD hedged terms. After having tightened in the face of rising rates in both the US and Europe, the market suffered from rising rates in September. The ongoing uncertainty over the Iran conflict, combined with hawkish messaging from both the Fed and ECB, led to continued rates weakness and a substantial bear flattening of the rate curves as investors priced in additional hikes and “higher for longer” rates. In both major geographies, economic growth seems to be holding well, adding fuel to the concerns over inflation. Given the bearish environment, spreads widened, ending September around 312 bps versus 270 bps at the end of August.
While there was some slight decompression between BB and B credits, performance for both ratings segments was similar given the longer duration in the higher quality bucket. CCCs underperformed on weak market sentiment. By region, Europe outperformed as the inflation picture seems to be more benign and dependent on a resolution to the Iran conflict. Oil prices appeared to stabilize at the end of the month, which helped the Bund outperform Treasuries. In the US and EM markets, Treasuries were the key factor given the 5-year Treasury sold off 59 bps to 5.09%. AI headlines continued to be a major driver of market risk as concerns over AI safety led to uncertainty over future growth assumptions for datacenter development, and also the release of Meta’s chatbot Muse put pressure on legacy subscription-based businesses such as insurance brokers, cable, and media. During the month, P&C Insurance, Air Transportation and Cable & Satellite TV were the weakest sectors in the market, while Theaters & Entertainment outperformed on AMC’s capital structure refinancing.
With both the European and US markets expecting three to four more rate hikes through 2027, a “higher for longer” rate environment is currently being priced into the high yield markets. Q3 earnings season is set to start in October, and how companies and consumers are weathering the increase in energy costs, interest rates, and global geopolitical uncertainty will determine the direction of risk for the markets. While we continue to expect significant new issuance, the two mega deals that came to market in September should remove a technical overhang, and with investors somewhat more discerning on new issues, hopefully we see more attractive value coming in the new issue market in the short term. High yield remains well-situated in the current market, with low duration and high quality. At the current yield to worst of 7.95%, all-in yields appear attractive, and the asset class is positioned to generate strong absolute returns for investors in the long term.
Disclosures
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