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.

Download PDF
Subscribe to Taxable Updates
Disclosures

This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.

Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.

Keep
Reading

Taxable Bond Snapshot August 2026

Taxable Bond | Insight

During August, the yield on the 30-year Treasury Bond hit a post-Global Financial Crisis (GFC) high of 5.34%. Subsequently, Treasury Secretary Bessent surprised the market by announcing plans to increase the size of buybacks for longer-dated US Government Bonds, briefly pushing yields lower.

Read Article

Understanding Preferred Securities: Features, Benefits, and Risks

Taxable Bond | Insight

Preferred securities can offer attractive income, tax advantages, and diversification. Learn how they work, the risks to consider, and GW&K’s approach.

Read Article

Taxable Bond Snapshot July 2026

Taxable Bond | Insight

Rates sold off, led by the front end of the Treasury curve, while longer-term Treasuries held up better. Investors shifted their focus from the conflict in Iran to the Federal Reserve and the domestic economy, as the market increased expectations for potential rate hikes.

Read Article