Clients often ask when our high yield bond portfolios are most likely to underperform. Our answer is consistent: periods when CCCs (the lowest quality segment of the high yield bond market), unrated bonds or less liquid parts of the market outperform.
One surprising characteristic of high yield markets is that during shallow bouts of volatility – such as the one we are currently experiencing – higher quality areas can sometimes underperform. We believe this reflects market structure and liquidity dynamics rather than a deterioration in underlying credit fundamentals.
Due to their higher liquidity, the BB and B segments of high yield can sometimes underperform lower-quality CCCs during modest sell-offs. In these environments, funds with higher credit quality may temporarily appear “higher beta”.
Our analysis of historic data shows that the deeper the level of market volatility, the more likely it is that higher-quality bonds’ stronger fundamentals show through in the form of more resilient performance.
Two weeks into the conflict in the Middle East, high yield has been relatively resilient (down around 1%, versus the S&P down roughly 3%, with European equities weaker still as at 13.03.26). In historical context, this is a modest period of risk-off behaviour — and one in which CCCs have outperformed.
To place this in context, we analysed daily total returns for the US high yield market and the CCC segment from 1997 to March 2026. This dataset of nearly three decades yields some important conclusions.
- In roughly 15% of down-market days, CCCs actually generated positive returns.
- However, on days when the US high yield market return was negative, CCCs underperformed the broader market approximately 67% of the time.
While drawdowns in high yield do not mechanically translate into immediate underperformance for lower-rated bonds, the probability of underperformance increases as volatility deepens. Short-term price movements therefore do not provide a simple or linear guide to underlying credit risk.
CCC behaviour in different types of sell-off
To illustrate this further, consider CCC performance across varying degrees of daily high yield drawdowns:
High Yield Daily Move | Instances of CCC Underperformance |
Mild decline (0% to -0.25%) | ~58% |
Moderate decline (-0.25% to -1%) | ~74% |
Sharp decline (≤ -1%) | ~78% |
In milder periods of volatility, lower-rated bonds often hold up better than many expect, underperforming “only” 58% of the time. But in more severe, systemic sell-offs, higher beta characteristics become more evident, with CCCs underperforming on roughly 78% of those down days.
Importantly, when CCCs do outperform during negative market days, the effect is typically short-lived. The median duration of such periods is just one trading day, and even the longest observed streak in nearly three decades was only four consecutive days.
This suggests that short-term relative resilience is often influenced by liquidity, flows and positioning rather than by a fundamental shift in underlying credit risk.
What about major drawdowns?
We also examined full peak-to-trough drawdowns where the high yield market fell more than 10%.
Out of 47 such episodes since 1997, CCCs outperformed peak-to-trough in just three cases (~6%). In deeper stress environments – such as 2008 or March 2020 – CCCs generally underperformed.
Again, the pattern is not binary. CCCs do not underperform in every down market, nor do they outperform in every mild one. But the data does show that as volatility deepens, the differentiation driven by underlying credit quality becomes more pronounced.
A broader perspective on risk
The key point is not that CCCs always outperform in mild volatility – they do not – nor that they always underperform in crises.
Rather, short-term drawdown behaviour is heavily influenced by liquidity, flows and positioning. Judging underlying credit risk purely through the lens of drawdowns can therefore be misleading.
Temporary relative resilience does not necessarily imply lower fundamental risk – just as temporary underperformance does not necessarily imply higher risk.
Credit risk ultimately manifests over a full cycle – particularly through defaults, recoveries and balance sheet resilience – not solely through short-term price movements.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The single strategy funds managed by the Multi-Asset team:
- May consider environmental, social and governance ("ESG") characteristics of issuers when selecting investments for the Funds.
- May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
- Holds Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
- May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
- May, under certain circumstances, invest in derivatives, but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead. The use of derivative instruments that may result in higher cash levels. Cash may be deposited with several credit counterparties (e.g. international banks) or in short-dated bonds. A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
- May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of the funds over the short term.
- May target an absolute return. There is no guarantee that an absolute return will be generated over the time period stated in the fund objective or any other time period.
The risks detailed above are reflective of the full range of single strategy funds managed by the Multi-Asset team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
Donald Phillips
Donald Phillips is head of credit in the Liontrust Multi-Asset team. He joined Liontrust in February 2018 from Baillie Gifford. Previously, Donald had been co-managing the European high-yield strategy at Baillie Gifford since 2010.
