Where this BlackRock fund manager is finding pockets of opportunity in high-yield bonds

BlackRock's Mitchell Garfin, co-head of U.S. leveraged finance and manager of the $27.5 billion BlackRock High Yield Fund (BHYIX), maintains a constructive outlook on the high-yield bond market despite its perceived expensiveness and some peers shifting to higher-quality assets. Garfin anticipates potential Fed rate cuts, possibly beginning in September, could bolster total returns, expecting spreads to remain stable or tighten. His strategy focuses on B-rated bonds as the 'sweet spot' and targets sectors such as technology (software), insurance brokers, and aerospace/defense for their strong cash flow and revenue stability, while selectively avoiding distressed CCC-rated segments.

Analysis

BlackRock's U.S. leveraged finance team, represented by co-head Mitchell Garfin, maintains a constructively optimistic view on the high-yield bond market, a stance that contrasts with more cautious peers moving into higher-quality credit. This outlook is underpinned by the expectation that the Federal Reserve will pivot to an easing bias, with Fed funds futures data indicating an 85% probability of a rate cut in September, which Garfin believes will enhance total return potential in the asset class. The core of the strategy for the $27.5 billion, top-quartile BlackRock High Yield Fund (BHYIX) is a focus on what Garfin terms the 'sweet spot' of the market: B-rated bonds, which comprise nearly 45% of the fund's assets. This allocation is driven by a relative value assessment, viewing higher-quality BB-rated bonds as fundamentally sound but offering insufficient compensation for risk, while exposure to lower-quality CCC-rated debt is highly selective and avoids distressed segments. Sector-wise, the strategy emphasizes areas with resilient cash flows and revenue streams, particularly technology (software), property and casualty insurance brokers, and aerospace and defense, citing strong recurring revenues, robust margins, and significant order backlogs as key defensive characteristics. This approach is now also accessible through a newly launched active ETF, the iShares High Yield Active ETF (BRHY).

Key Decisions for Investors

• Investors aligned with a constructive view on the economy should consider overweighting the B-rated credit segment, which BlackRock's analysis suggests offers the most efficient use of capital relative to expensive BBs and riskier CCCs.
• Portfolio allocations could be tilted towards sectors with high revenue visibility and strong free-cash-flow generation, such as software, insurance brokerage, and aerospace and defense, to mitigate potential economic rockiness.
• Closely monitor Federal Reserve communications and upcoming economic data, as the thesis for high-yield returns is significantly tied to the anticipated start of a rate-cutting cycle in September.
• For direct exposure to this specific management strategy, investors can evaluate the established BlackRock High Yield Fund (BHYIX) or the newly launched iShares High Yield Active ETF (BRHY).