The Importance of Credit Quality in High Yield

GW&K Taxable Bond Team | August 2026

Not all high yield bonds have behaved alike in 2026, and we believe the significant gap highlights why a disciplined credit process leads to better performance. Through July 31, spreads on BB-rated bonds were essentially unchanged for the year at 165 basis points (bps) over Treasuries. Meanwhile, CCC spreads widened by 211 bps, reaching 826 bps over Treasuries (Figure 1).

The widening in CCC spreads reflects increased stress among some of the market’s most highly leveraged issuers. Higher interest costs, refinancing challenges, and continuing business uncertainties have increased default risk while higher-quality issuers have generally been more resilient.

That divergence has translated into a meaningful difference in performance. BB-rated bonds generated a 1.60% total return and 139 bps of excess return versus duration-matched Treasuries through July, compared with a 1.16% total return and 68 bps of excess return for CCCs.

For GW&K, an emphasis on higher-quality high yield has been beneficial. Our overweight positions in BB-rated securities and avoidance of CCC-rated securities have contributed to relative outperformance this year, a trend that we believe could continue going forward.

This year’s divergence illustrates why security selection is so important in high yield: The goal isn’t simply to take more risk, but to identify where that risk is worth taking.