And yet, many investors with junk bonds are missing out.

That’s because they aren’t thinking globally with their allocations. Today, high-yield bonds are a global phenomenon, encompassing billions of bonds outstanding and being issued across America, Asia, and Europe. For investors, these global high-yield bonds can provide plenty of high income and strong total returns. *

The concept of a junk bond is easy to understand. By definition, high-yield bonds are issued by firms with less than investment-grade credit ratings. Typically, junk bonds are rated BB or lower by Standard & Poor’s and Ba or lower by Moody’s. While the ratings feature some gray areas, the gist is there is some risk of default or issues that could prevent the payback of the bonds. And in that, investors demand higher yields and coupon payments to compensate for that risk.

The high-yield market came of age during the 1980s as leveraged buyout deals were financed by raising debt in capital markets. It was a novel concept back then and investors were able to score yields with an average of 14.5%. By the 1990s, newly issued junk bonds were hitting the market in spades as unprofitable and growing tech firms sought financing. Since 2000, junk bonds have grown from roughly a $300 billion market to a $2.2 trillion one today.

The key to that growth has been the international launch of bonds outside the United States.

Just like the investment-grade space, international firms have begun tapping the junk bond market to raise capital. Today, high-yield bonds from Europe and other emerging markets are now standard. Those bonds cover a wide range of industries as well, from telecoms and tech to energy and healthcare.

And yet, investors are woefully under-represented in the international junk bond space, with many investors having no exposure at all. State Street notes that institutional investors typically have only a meager 2% to 3% of their portfolios allocated to high-yield bonds in the first place.

So, why bother with global high-yield bonds? For starters, they have featured better returns than strictly U.S. junk debt, and investors are more than overcompensated for the additional risks associated with high-yield bonds.

As we said, junk debt is the debt of the riskiest borrowers–rated Ba/BB or lower. Naturally, these riskier borrowers have a higher propensity for default. Historically, junk bond default rates have hovered between 3% and 5%, but during periods of economic distress, that rate is closer to 8%. To cover these high default rates and propensity for investors to receive next to nothing, they demand higher yields than, let’s say, Treasuries issued by the Feds or a bond from Apple.

This higher yield works wonders for total returns.

Because investors receive much of their return back as cash/coupon payments, any additional return from price increases can be considered gravy. And because of the volatility associated with the asset class, prices do move.

The result is that high-yield bonds can even consistently outperform equities. The boost is that global high-yield bonds often have more ‘perceived’ risk than actual risk given hometown bias and the fact they are ignored by most investors. This leads to higher yields that, in turn, produce better returns and overcompensation versus U.S. junk bonds even with equity indexes.

This chart from State Street shows the returns, volatility, and return/risk ratios for major asset classes. You can see how global high yield slightly beats out U.S. junk debt and provides a better return/risk ratio.

Source: State Street

Those high yields work another way as well: volatility dampening and loss prevention, particularly when compared to equities. Global junk bonds have provided fewer drawdowns than the MSCI World Index and have recovered more quickly since 2000 versus the global stock index. An additional effect is that the make-up of local and regional global bond markets is different from the U.S. Different economic conditions affect these areas non-unilaterally. What brings the U.S. and its sector make-up is not the same as China’s or Germany’s. This provides additional diversification benefits.

There is a benefit to owning global junk bonds over strictly U.S. ones. Here, investors can potentially get better returns, reduce their equity volatility, and provide plenty of diversification benefits.

The added win is that today could be one of the best times to buy global junk in years. The global macroeconomic environment remains strong for junk with economic growth starting to reignite. At the same time, the lending environment has begun to improve. While the U.S. has started its rate-cutting journey, rates in Europe never hit similar highs and many central banks already began cutting before the U.S. Fed. This makes borrowing and, more importantly, refinancing existing loans much easier. And yet, credit spreads and yields remain high for junk, with yields around 8%.

That provides a wonderful starting point for income and great long-term total returns.

And thanks to the birth and growth of ETFs, adding global and international junk to a portfolio is easy. There are now numerous passive and active ETF choices for the sector. Adding one of these funds makes building a global junk bond portfolio easy.

These funds were selected based on their exposure to the global and international junk bond sector. They are sorted by their YTD total return, which ranges from 1.4% to 9.4%. They have assets under management between $30M and $135M. They are currently yielding between 3.35% and 7.35%. 

Ultimately, global junk bonds can provide better returns for portfolios and higher yields. Investors looking to this market shouldn’t just focus on U.S. firms. There are added benefits in going abroad and seeking a global approach.

Junk bonds and the high-yield market can provide plenty of benefits to a portfolio. But what’s even better is going global in that approach. With a growing market for high-yield bonds overseas, investors should go global with their junk bond exposure. Better returns and higher yields await.

¹ State Street (September 2024). The Evergreen Case for a Strategic Allocation to High Yield