In the Hunt for Income, It’s Wise to Broaden Your Horizons

03 February 2025

4 min read

Gershon M. Distenfeld, CFA | Director—Income Strategies

Fahd Malik| Portfolio Manager—Income Strategies

Monika Carlson| Managing Director, Senior Investment Strategist and Head—Income and Systematic Fixed Income Business Development

The evolving high-yield markets make the case for a global, multi-sector approach to generating income.

Over the years, the high-yield markets have advanced to the point where investors can be increasingly selective about how they source income. Given today’s elevated yields and wide array of high-quality offerings, generating income doesn’t necessitate a white-knuckle roller-coaster ride. But it may require broadening your horizons. We believe investors looking to prioritize efficient income—maximizing income while managing downside risk—should consider a global, multi-sector approach.

Increasing Income Opportunities by Going Global

Sourcing efficient income typically includes US high-yield corporate bonds—that’s part of the recipe. But it’s not the sum total. In our view, some of the most compelling avenues for generating efficient income lie beyond US shores. The global high-yield corporate universe is roughly twice the size of the US high-yield market, so going global opens significantly more possibilities than a US-only strategy.

One of the biggest benefits of a global opportunity set is the ability to diversify portfolio risk. After all, one region of the world may be at an entirely different stage of the economic cycle than another while companies in the same industry may be operating under different interest-rate regimes—allowing for idiosyncratic opportunities at the issuer and security level. This kind of desynchronization means investors can pull different levers to target desired risk levels—allowing for a more defensive posture when needed.

We believe that investing globally can also shore up portfolio yields and help generate alpha. US high-yield bonds periodically outperform their global peers, and vice versa. These fluctuations in market leadership tend to occur in cycles. After several years of US high-yield dominance, global high yield has reasserted itself over the past 24 months. Over longer periods, the Bloomberg Global High Yield Index has outpaced the Bloomberg US Corporate High Yield Index by 0.9%, on average, since 1999 (Display)—a general trend we expect to continue over the next couple of years.

Global High Yield Has Outperformed US High Yield Over Time

Global High Yield vs. US High Yield: 12-Month Trailing Relative Return (Percent)

Historical analysis does not guarantee future results.
Global high yield is represented by the Bloomberg Global High Yield Index USD Hedged; US high yield is represented by the Bloomberg US Corporate High Yield Index.
Through December 31, 2024
Source: Bloomberg and AllianceBernstein (AB)

Finding Income Opportunities Beyond US High Yield

We believe that today’s income-oriented investors should also consider a multi-sector approach that goes beyond US high-yield corporates. For example, today we see benefits from opportunistically investing in emerging-market (EM) corporates, securitized debt, euro high yield and even investment-grade credit.

EM corporate bonds have historically allowed for participation in rising markets while, somewhat counterintuitively, exposing investors to less downside during market downdrafts. Our research suggests that EM corporates with revenues tied to the US dollar are likely to benefit from a stronger dollar. EM corporates can also tap the potential of fast-growing markets in the developing world.
Securitized debt instruments, such as select residential mortgage bonds, offer competitive yields. And our analysis shows that, in many cases, these investments carry less risk than US high-yield bonds. Certain parts of the securitized markets also provide diversified exposure to the US consumer.
In Europe, high-yield bond yields look historically attractive from our vantage point. Starting yields have frequently been a good predictor of future returns over the ensuing three to five years, irrespective of market conditions. And in today’s market, a global approach to bond investing can boost yields further if bonds denominated in foreign currencies are hedged back to the US dollar.

We believe that, in addition to providing plentiful opportunities to capture more income and strengthen potential returns, a multi-sector approach helps diversify portfolios and acts as a bulwark against geopolitical disruptions and other shocks.

Tight Spreads Shouldn’t Deter Investors

Some investors are concerned about narrow yield spreads in the corporate credit markets. We agree that credit spreads are indeed tight. However, we don’t think that’s a reason to avoid corporate bonds today. For one thing, historically, spreads have remained tight for more than two years, on average (Display). We don’t expect them to widen meaningfully anytime soon.

Historically, Spreads Have Stayed Tight for Extended Periods

Bloomberg US Corporate High Yield Index: Spreads (Basis Points)

Historical analysis does not guarantee future results.
Highlighted periods are defined as periods in which spreads crossed below 400 basis points before crossing long-term average spread level of 517 basis points.
Through December 31, 2024
Source: Bloomberg and AB

Moreover, we believe spreads are narrow for good reason. Corporate fundamentals are sound, which has supported demand—particularly on the long end of the yield curve. With a new US administration taking the reins, we expect this trend to continue in the US credit markets. Key provisions of 2017’s Tax Cuts and Jobs Act are expected to sunset this year, and any extensions or enhancements to this legislation could keep spreads range-bound.

Tactically De-Risking with High-Yield Bonds

Beyond expanding their horizons, we believe investors should consider reframing their view of high-yield bonds. Even though high-yield bonds look like other bonds, they don’t necessarily act like them. In fact, over time, high-yield bonds have produced 75% of the return of equities with just half the risk (Display).

High-Yield Bonds Stack Up Well Against Equities

Percent

Historical and current analyses do not guarantee future results.
US high yield is represented by the Bloomberg US Corporate High Yield Index; inception date: July 1, 1983. S&P 500 data since March 31, 1936.
Annualized return and volatility are calculated based on data since inception. S&P 500 current yield is calculated as estimated forward dividend yield. US high-yield current yield is calculated at current yield to worst.
Through December 31, 2024
Source: Bloomberg, S&P and AB

What’s more, during major equity sell-offs, equities have generally declined more sharply than high yield while high-yield bonds have recovered more quickly. That could prove timely if growth slows, equity returns moderate and stock valuations come off their current lofty levels over the coming years, as we expect. Meanwhile, high yield has historically outperformed in the years following the Fed’s initial rate cut (Display). That’s why, in our view, high-yield bonds may be a sensible substitute for a small portion of an investor’s equity allocation today.

High Yield Has Historically Performed Well in Years After Fed’s First Cut

Median Five-Year Returns and Volatility Following Initial Federal Reserve Rate Cut (Percent)

Historical analysis does not guarantee future results.
High yield is represented by the Bloomberg US Corporate High Yield Index. Equities are represented by the S&P 500 Index.
January 1, 1984, through December 31, 2024
Source: Bloomberg, Federal Reserve, S&P and AB

The coming year presents no shortage of potential risks and policy uncertainty. But dialing down risk doesn’t have to mean sacrificing income. For opportunistic investors, a global, multi-sector approach may be just the formula for navigating an uncertain market environment.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Gershon M. Distenfeld, CFA

Gershon Distenfeld is a Senior Vice President, Director of Income Strategies and a member of the firm’s Operating Committee. He is responsible for the portfolio management and strategic growth of AB’s income platform with almost $60B in assets under management. This includes the multiple-award-winning Global High Yield and American Income portfolios, flagship fixed-income funds on the firm’s Luxembourg-domiciled fund platform for non-US investors. Distenfeld also oversees AB’s public leveraged finance business. He joined AB in 1998 as a fixed-income business analyst and served in the following roles: high-yield trader (1999–2002), high-yield portfolio manager (2002–2006), director of High Yield (2006–2015), director of Credit (2015–2018) and co-head of Fixed Income (2018–2023). Distenfeld began his career as an operations analyst supporting Emerging Markets Debt at Lehman Brothers. He holds a BS in finance from the Sy Syms School of Business at Yeshiva University and is a CFA charterholder. Location: Nashville

Fahd Malik

Fahd Malik is a Senior Vice President and Portfolio Manager on the Fixed Income team, responsible for Income Strategies. His focus is on creating portfolios that utilize a multi-sector approach to generate efficient income. Prior to taking on this role, Malik served as a portfolio manager for AB’s Absolute Return fund. He joined the firm in 2006 and has extensive experience in systematic, market-neutral, risk-mitigating and derivative strategies. Malik holds a BS in electrical and computer engineering from The Cooper Union for the Advancement of Science and Art and an MS in mathematics in finance from the Courant Institute of Mathematical Sciences at New York University. Location: New York

Monika Carlson

Monika Carlson is a Managing Director, Senior Investment Strategist, and Head of the Income and Systematic platforms for the Fixed Income Business Development team. She is responsible for leading a team of investment strategists and product managers and for driving growth efforts on AB’s fixed-income platform. Additionally, as part of her client-facing role, Carlson represents AB’s market views and portfolio strategies to clients, prospects and consultants globally. She has held several roles at AB, including as the head of the Global Offshore Retail Platform in Product Management. Prior to joining AB in 2007, Carlson worked at Neuberger Berman. She holds a BBA in finance from Baruch College at the City University of New York and is a CFA charterholder. Location: New York

This information is for exclusive use of the wholesale person to whom it is provided and is not to be relied upon by any other person. It is not intended for retail or public use and may not be further distributed without prior written consent of ABAL.
This webpage has been prepared by AllianceBernstein Australia Limited (“ABAL”)—ABN 53 095 022 718, AFSL 230 698. Information in this webpage is only intended for persons that qualify as “wholesale clients,” as defined by the Corporations Act 2001, and is not to be construed as advice. This webpage is provided solely for informational purposes and is not an offer to buy or sell securities. The information, forecasts and opinions set forth in this webpage have not been prepared for any recipient’s specific investment objectives, financial situation or particular needs. Neither this webpage nor the information contained in it are intended to take the place of professional advice.
You should not take action on specific issues based on the information contained in this webpage without first obtaining professional advice. Past performance does not guarantee future results. Projections, although based on current information, may not be realized. Information, forecasts and opinions can change without notice and ABAL does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained in this webpage, ABAL does not warrant that this webpage is free from errors, inaccuracies or omissions. ABAL disclaims any liability for damage or loss arising from reliance upon any matter contained in this webpage except for statutory liability which cannot be excluded.
No reproduction of the materials on this webpage may be made without the express written permission of ABAL. This information is provided for persons in Australia only and is not being provided for the use of any person who is in any other country.