Let’s face facts. It’s starting to feel like a slowdown when it comes to the U.S. economy. Economic data ranging from GDP growth and labor health to manufacturing output and housing have all started to tick downwards. That’s caused all sorts of problems in the broader bond and stock markets. Volatility has ranged supreme, and investors are starting to get defensive with their portfolios.
But one asset class is entering a goldilocks period- offering high returns in the current market uncertainty.
We’re talking about high-yield bonds. It turns out that junk bonds and their current high yields are wonderfully suited for the current economic environment. Offering stock-like returns with a bit of safety. For fixed-income and stock market investors, the bond variety has a lot to offer in the quarters ahead.
Economic Contraction Risk Is Rising
Things aren’t exactly super rosy for the U.S. economy. Already, we’ve seen some indicators that the economy is beginning to slow under the weight of high interest rates and tariff-born inflation.
This week, the data helped confirm that the labor market is the latest to show a downward trend. Nonfarm payrolls fell to just 22,000, and annual revisions for the year before March 2025 were revised downwards by a massive 911,000. These numbers were much more than expected.
Consumers, who have been a major driver of the U.S. economy since the pandemic, have also started to cut back. While headline numbers showed an increase, many economists have now postulated that tariff-driven price increases were the cause of the gains across many consumer categories, not volume of sales. Additionally, several key retailers and fast-casual eateries have warned of declining sales and foot traffic.
These woes have been added to recent downtrends in housing and industrial activity, which, after a pre-tariff spike, have started to decline.
But the economy isn’t necessarily bad. Just slowing. There’s still some evidence that the spike in inflation isn’t all tariff-related. With inflation still running hot and uncertainty about the Fed’s long-term path to interest rates, analysts are now predicting a slowdown for the U.S. economy rather than a full-blown recession. GDP forecasts from Bloomberg and the FOMC are now hovering below 2%.
High Yield Wins Out
For investors, this creates a fascinating conundrum. Slowing economic activity doesn’t exactly bode well for the broader equity market. Especially with valuations still stretched. You can see that in the current volatility of the stock market. Even the broader bond market has been pretty bouncy.
The answer to both problems could be junk bonds. While it may seem counterintuitive given their higher risk, the high-yield market is very suited to the current economic environment. That’s the gist, according to a new whitepaper from BNY’s Insight Investment group.
Looking at historical data, Insight reveals that when U.S. economic growth has declined from above 2% to a range of 0% to 2%, as currently forecasted, high-yield bonds have tended to outperform Treasuries, investment-grade bonds, and even the S&P 500. When GDP growth is within that range, high-yield bonds have managed to return 8.3%- more than three percentage points more than stocks and just under three points versus treasury bonds. 1
This chart from the asset manager highlights their findings.
Source: Insight Investment
And there are several reasons for the outperformance.
For starters, while slowing economic growth on average implies slowing profit growth, it doesn’t necessarily have to do with the inability to repay debts. For equity investors, profit and dividends are what drive valuations. When those profit expectations and reality change, so does equity pricing. In this case, people sell when stocks are overvalued. But debt repayment is often a priority and taken from operating cash flows, not profits. A slowdown in the economy still implies that debts will be repaid. Moreover, the credit ratings of junk bonds seem to support this idea. BB-rated bonds now comprise 50% of the market. Meanwhile, lower quality CCC bonds are at 10%. That’s an increase in strong debt payers and a decrease in the number of weak ones.
Secondly, income is another reason to be excited about high-yield debt and its potential outperformance.
Right now, junk bonds are offering a starting yield-to-worst of around 7.5%. While that’s a little lower than a year ago, it still represents a high yield and, according to Insight, is enough cushion for the asset class in a recession or slow growth scenario. Data also shows that starting yields have a lot to do with future returns across a wide range of bond asset classes. In fact, a study by the Royal Bank of Canada (RBC) shows that a bond’s starting yield explains more than 90% of the expected future return with an R-squared of 0.91 and a correlation coefficient of 0.96.
With these historical factors in tow, high-yield bonds could be entering a period of strong outperformance as the economy gets dicey. And even if the economy pulls out, the high-yield sector still has the potential to deliver strong returns in excess of other bond varieties.
Making A High-Yield Play
Given the slowdown potential of the U.S. economy and high yield ability to navigate that slowdown as well as outperform equities and other bonds, it makes sense for investors to consider loading up on junk bonds.
With the difficulties of buying individual junk bonds, the best way to do so is via a broad ETF or fund. Now the choice to index or choose active management is up to the investor. But there is plenty of evidence that suggests that active funds in the high-yield space do better and outperform passive options. Either way, ETFs offer a low-cost portfolio play that can be quickly used to add the sector to a portfolio.
Active Junk Bond ETFs
These funds are selected based on their ability to access high-yield bonds with an active touch. They are sorted by their YTD total return, which ranges from 4.1% to 7.8%. Their expense ratio ranges from 0.22% to 1.05%, while they have AUMs between $196M and $6.8B. They are currently yielding between 6.1% and 7.6%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| PHYL | PGIM Active High Yield Bond ETF | $309M | 7.8% | 7.6% | 0.39% | ETF | Yes |
| FLHY | Franklin High Yield Corporate ETF | $641M | 6.9% | 6.1% | 0.40% | ETF | Yes |
| HYFI | AB High Yield ETF | $196M | 6.9% | 6.2% | 0.40% | ETF | Yes |
| BKHY | BNY Mellon High Yield Beta ETF | $367M | 6.6% | 6.8% | 0.22% | ETF | Yes |
| HYLS | First Trust Tactical High Yield ETF | $1.7B | 6.3% | 6.8% | 1.05% | ETF | Yes |
| THYF | T. Rowe Price U.S. High Yield ETF | $761M | 5.9% | 7.3% | 0.56% | ETF | Yes |
| HYBL | SPDR Blackstone High Income ETF | $401M | 5.7% | 7.2% | 0.70% | ETF | Yes |
| YLD | Principal Active High Yield ETF | $318M | 5.6% | 6.4% | 0.39% | ETF | Yes |
| SRLN | SPDR Blackstone Senior Loan ETF | $6.8B | 4.6% | 7.6% | 0.70% | ETF | Yes |
| FTSL | First Trust Senior Loan Fund | $2.4B | 4.1% | 6.4% | 0.86% | ETF | Yes |
Passive Junk Bond ETFs
These funds were selected based on their exposure to the junk bond sector and yields. They are sorted by their YTD total return, which ranges from 6.7% to 6.9%. They have expenses ranging from 0.05% to 0.49% and assets under management between $3.9 billion and $24 billion. They are currently yielding between 5.7% and 7.3%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| USHY | iShares Broad USD High Yield Corporate Bond ETF | $23.8B | 6.9% | 6.9% | 0.08% | ETF | No |
| HYG | iShares iBoxx $ High Yield Corporate Bond ETF | $17.4B | 6.8% | 5.7% | 0.49% | ETF | No |
| JNK | SPDR Bloomberg High Yield Bond ETF | $7.9B | 6.8% | 6.5% | 0.40% | ETF | No |
| HYLB | Xtrackers USD High Yld Corporate Bd ETF | $3.93B | 6.8% | 6.6% | 0.05% | ETF | No |
| SPHY | SPDR Portfolio High Yield Bond ETF | $8.7B | 6.7% | 7.3% | 0.05% | ETF | No |
All in all, economic slowdowns are worrisome for investors. But high-yield bonds seemed poised to outperform equities and other bond types. With high starting yields and placement in the repayment ladder, they can deliver strong returns if the economy dips lower.
Bottom Line
The economy is starting to get dicey. For many investors, this is a big challenge in how to position their portfolios. High-yield bonds could be the answer. Offering more substantial returns when the economy dwindles, these fixed-income assets are an excellent portfolio play.
1 Insight Investment (August 2025). Systematic Insights: Is this high yield’s Goldilocks zone?
