Five reasons for income investors to consider high yield

High yield remains an underappreciated asset class, with many investors seemingly put off by the outdated nickname of ‘junk bonds’. Yet it is their loss, as the asset class can offer high returns, as well as yields, while keeping volatility low. 

For income investors in particular, high-yield bonds can play a valuable role within a multi-asset portfolio. They provide diversification away from government bonds, superior returns compared to investment grade credit and lower volatility than equities. This is why more than half of the Artemis High Income Fund’s portfolio and a quarter of the Artemis Monthly Distribution Fund is held in high yield¹. 

Below are five reasons why we believe income investors should take a closer look at high-yield bonds.  

1) Higher yields mean higher returns 

One question we are often asked is: in a world of higher ‘risk-free’ rates where we can get a decent income on government bonds, why take the additional risk from high yield?  

The surprising answer is that investors receive a larger return when base rates are higher, even if the spread is the same.  

Consider two different environments: a higher-rate world (5% risk-free rate, 8.5% high yield) and a lower-rate one (1% risk-free rate, 4.5% high yield). The additional spread from high yield is the same (3.5%) in both scenarios. 

Over 20 years, the additional return from being in high yield over risk-free assets in a higher-rate environment would be 246%, while in a lower rate environment it would only be 119%. Yes, risk-free rates provide a more respectable return in a higher-rate environment – but investors are losing out on a lot more by not holding high-yield bonds. 

Counter-intuitively, the additional yield from high yield matters more in a higher interest rate environment

Source: Artemis

2) High yield is getting safer  

High yield has had its problems in the past, but it has ironed these out over time and is now safer than ever before, for three main reasons:  

• The market has gone from 20% in CCCs and 40% in BBs 15 years ago to 9% in CCCs and 60% in BBs today. This suggests the default rate from here is likely to be half that of its historical level. 
• Unlike most cycles over the past 50 years, high yield has not been a source of incremental borrowing over the past decade – the size of the market hasn’t changed over this time. As defaults disproportionately occur in the early years of an issuer’s entrance into the high-yield universe, this ageing is positive for credit quality. 
• Any company more than five years old has already experienced: a cyclical downturn in Covid of a speed and depth never seen before; an aggressive tightening of supply chains in 2021 and 2022; and a doubling or trebling of the interest they were paying on their debt from 2022 to 2023. To us, that looks like a decent stress test for future resilience. 

3) Equity-like returns with much lower volatility 

The great thing about yields when they are at their current levels is that you do not need a market movement in your favour to generate strong returns. Today, the high-yield market is yielding as much as it did in April 2022. By way of example, our Artemis Funds (Lux) – Short-Dated Global High Yield Bond strategy has delivered an annualised return of 7.6%² since then, with no net tightening.  

What is also interesting is how little volatility we took to achieve this return. Although the global stock market did fantastically over this time, the journey has not been a smooth one: the MSCI World index has a Sharpe ratio (a measure of risk-adjusted return) of 0.74 during this period, below the 0.83 from our fund³.  

4) Returns can be higher than you think  

With high-yield bonds, you tend to get a higher realised yield than the advertised figure, due to a general provision allowing the issuer to ‘call’ or redeem the debt early to improve their liquidity profile. 

This redemption takes place at a price of 100c (‘par’) or above and tends to be executed between three and five years ahead of maturity.  

When bonds are trading below par, the advertised ‘yield to worst’ figure will be the yield to its final maturity. Yet any earlier redemption by the company would effectively cause the price of the bond to rise to that 100c level sooner than the final maturity date, increasing the yield. 

The reason this is so interesting today is that most of the high-yield bond market is trading below 100c, creating a powerful potential tailwind for future performance. 

5) Higher yields make it harder to lose money 

One of the criticisms levelled at the high-yield market today is that spreads are currently close to historical tights, meaning there is greater potential for losses if they were to widen.  

But this ignores the fact that the high yields of today would cancel out a significant proportion of losses for anyone with more than the shortest of time horizons.  

For example, Artemis Funds (Lux) – Global High Yield Bond is currently yielding 6.7%⁴, meaning its price would need to fall by more than this amount (and stay there) over the course of a year for an investor to lose money.  

How likely is this? Well, if spreads moved from their current tights to their median level, you would make a return of 5.2%. If yields moved to their 75th percentile, you would still be in positive territory. Even if spreads widened to their 95th percentile, the losses over one year would be limited to 2.4%.  

High income and low duration insulates in spread widening scenarios 

When spreads have been at the 95th percentile or above, global equities have historically delivered a 30% loss in the 12m run-up to that point.

Source: ICE BofA Indices, Bloomberg, Artemis as at 31 Oct 2025 

The 95th percentile is not a ‘soft’ option – we are talking about a level that has only been breached (in most cases very briefly) on three occasions over the past 27 years. On average global equities have lost 30% over the 12 months to that point. 

It is also worth remembering that the high-yield market tends to recover quickly after periods of stress as it has created a scenario of obvious mispricing. 

For example, the global high-yield market recovered its full peak-to-trough loss after the Global Financial Crisis in less than seven months. It took global equities 65 months (almost 10 times as long) to do the same. 

Jack Holmes co-manages the Artemis High Income Fund and the bond element of the Artemis Monthly Distribution Fund. He also co-manages Artemis' Global High Yield and Short-Dated Global High Yield strategies.