There are plenty of opportunities for investors to rake in some attractive payouts in the high-yield bond market, yet there is one “sweet spot” that has the best relative value, according to Mitchell Garfin, co-head of U.S. leveraged finance at BlackRock. Along with David Delbos, Garfin manages the $26 billion BlackRock High Yield Fund (BHYIX) , which has earned four stars and a gold rating from Morningstar. The total returns over the trailing one-, three-, five-, 10- and 15-year periods have been in the top quartile of its peer group, per Morningstar. In June, BlackRock launched a high-yield exchange-traded fund version, also actively managed by Garfin. The iShares High Yield Active ETF (BRHY) has a 30-day U.S. Securities and Exchange Commission yield of 6.54% and a 0.45% expense ratio. BRHY mountain 2024-06-17 iShares High Yield Active ETF’s performance since its June 17, 2024 launch. While high-yield credit spreads are tight and some are calling the bonds “rich,” Garfin disagrees. He is comfortable with the spread levels right now because the high-yield market has evolved. “It’s a higher-quality market, one that warrants a lower overall spread level and one that we’re more comfortable underwriting risk in,” he said. The fund invests across the high-yield market, which is considered riskier than investment-grade corporates. However, it has the heaviest allocation in B-rated bonds. BRHYX has nearly 49% in Bs, compared with 31% BB and 13% below B. “We think this single-B cohort of the market is the sweet spot for credit investing today,” said Garfin. He thinks Bs have the best value and credit quality. B-rated bonds can yield between 6.5% and 8%, although he would question the high end for a high-quality issuer. While the BB-rated segment is considered higher quality within high yield, they are trading at fairly rich levels compared with the lower quality part of the investment-grade market, Garfin said. Bonds that are rated BBB- or higher at Standard & Poor’s and Fitch, and Baa3 or higher at Moody’s, are considered investment grade. Within CCC-rated bonds, Garfin sticks with the higher-quality part of the segment and stays away from those that are stressed or distressed. Sector opportunities Garfin is constructive on technology, with a focus on the software market. “Software, in general, provides greater stability of cash flows,” he said. “The recurring revenue stream that these software companies provide is what gives us that comfort when we’re underwriting credit risk, albeit with fairly levered capital structures.” Another sector Garfin likes is insurance brokers. The space has very good organic growth, he said. “Credit fundamentals remain strong, remain resilient. Pricing power is very high,” he said. There is also the potential for further M & A, he added. Among the top holdings in BHYIX are bonds from insurance brokers Hub International and Alliant Holdings, as well as Cloud Software Group in the software space.
