Why high-yield bonds remain attractive despite uncertainties

• Andrea Villani
  Head of High Income
  Eurizon

European companies in particular have solid balance sheets: debt is falling while cash positions are rising, fuelled by positive interest income on short-term investments. This combination creates a favourable environment, supported by another key development: the relaxed maturity wall. Over the next two years, only a small amount of refinancing is required, and this mainly affects issuers with good credit ratings in the BB range. The expected default rates also give cause for confidence: they are likely to remain below the long-term average. If the fundamentals are sound and companies are generating cash flow, even a volatile environment can be handled well.

Sector check: recognising risks, seizing opportunities

The market in 2024 was homogeneous in many areas – 2025, on the other hand, promises more differentiation. This is precisely where active strategies offer potential: those who are able to identify securities with a solid risk-return profile can generate alpha. This environment is ‘ideal for credit picking’ – the targeted selection of individual securities based on in-depth analysis. The increasing disparity between market winners and losers is a challenge, but it is also a great opportunity. We thrive on this dispersion. It forces us to look even more closely and at the same time offers enormous potential for total return strategies.

It is hardly possible to make a general statement about which sector could come under the most pressure in 2025 – the respective capital structures are too different. Nevertheless, some areas are considered particularly worthy of observation. For example, the automotive industry is considered unpopular, but it offers attractive entry opportunities in some cases – especially for large, well-rated companies with higher yields. If a security rises from 4% to 6%, it becomes interesting again – provided that the risk is priced correctly. Losses mainly occur when expectations that are too high are not met.

The picture in the chemicals sector is mixed. While companies operating in areas such as aluminium or defence could benefit from the current environment, manufacturers of traditional plastic products are coming under increasing pressure

We are currently critical of direct investments in the defence sector – simply because there are no attractive deals at the moment. More interesting are indirect beneficiaries such as commodity producers or certain chemical companies that stand to profit from new investments. The deciding factor is always the cash flow. High debt combined with low cash flow makes an investment unattractive despite its thematic relevance.

Inflation and growth – Europe has advantages over the US

A differentiated look at inflation shows that for high-yield investors, moderate inflation is not necessarily negative. Rising prices increase revenues and EBITDA, while nominal debt remains constant, leading to falling leverage ratios. As long as it doesn’t last too long, inflation can be a lever, not just a risk. The picture in Europe differs significantly from that in the US. While a combination of falling growth and rising inflation is causing uncertainty in the US, Europe is benefiting from a different environment: low growth, traditionally low inflation – and, more recently, strong fiscal stimulus. Germany alone is injecting around a trillion euros into the market with its defence programme. This is a historic opportunity – Europe is in a better position than the US in 2025. Investors should therefore focus more on the macroeconomic opportunities in Europe.

Promising segments: CoCos, satellites and labs

Another stabilising factor: many companies are actively managing their financing structure – and are making targeted use of instruments such as floating rates or leveraged loans to adapt to changing interest rate scenarios. They are also flexibly switching between high-yield bonds and loans – depending on which form of financing is more favourable. This is a natural management tool that increases companies’ resilience.

Niche areas currently offer particularly interesting prospects. These include contingent convertible bonds (CoCos), which benefit from a steeper interest rate environment, regulatory stability and healthy bank balance sheets. The focus is also on companies in the healthcare segment as well as the often-underrated satellite industry. The latter has long been considered risky, but selectively offers compelling investment opportunities, particularly in the context of defence spending.

Opportunities often arise where the market is overly cautious. What nobody wants is often exactly what you should take a closer look at.

Conclusion: high yield remains a robust building block – selection is crucial

High-yield bonds remain a robust component of any asset allocation in 2025 – in both growth and recession phases. In recessive scenarios, the carry character offers stability, while in growth phases the segment participates disproportionately. However, there are no one-size-fits-all strategies: in a market that is no longer a one-way street, only careful selection determines success or failure.