Beyond the Headline Yield: A More Efficient Way to Access High Yield Credit

High yield investments often showcase attractive nominal yields - but are your clients earning what's advertised? Realized returns frequently fall short of quoted yields due to default losses, especially in lower-rated credits.

At Curasset Capital Management, we employ a practical framework that goes beyond headline yields. By incorporating realistic adjustments to arrive at a Yield to Default (YTD) measure, we explicitly incorporate the loss rates associated with investments in leveraged credit.

For example, on 3/31/2025, CCC-rated corporate bonds offered a Yield to Worst (YTW) of 10.95%. However, YTW assumes that all bonds mature at par. After accounting for high losses associated with CCCs, the expected return plunges to only 1.23%.

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Expanding this analysis to other rating cohorts, we find that historically BB-rated bonds have consistently delivered higher risk-adjusted and absolute returns compared to lower-rated peers (see chart). Despite their advantages, BB-rated bonds often remain overlooked because investment-grade mandates can't hold them, and typical high yield funds are incentivized to chase nominal yields instead.

Similar logic applies to structured credit, such as BB-rated tranches of CLOs and subprime auto ABS. These securities include structural protections like subordination, overcollateralization tests, reserve accounts, and excess spread, significantly enhancing their credit profile. Additionally, structured BB tranches improve in credit quality over time as senior tranches amortize.

We invite you to think about investments in high yield through this lens. By focusing on Yield to Default and strategically positioning across corporate and securitized investments in the BB space, you can potentially capture better risk-adjusted and absolute performance for your clients.