High yield investing often feels like equity investing in disguise: investors get exposure to individual company fundamentals and sector dynamics, but instead of riding the ups and downs of share prices, they are lending money with the benefit of contractual cash flows. The European high yield bond market, in particular, has matured into a more transparent, liquid and diverse universe. With credit spreads having widened since the “Liberation Day,” this space has become more attractive for credit-focused investors.

Simon Matthews, Senior Portfolio Manager at Neuberger Berman, draws a compelling analogy between high yield bond investing and equity investing: “High yield investing is probably most similar to investing in equities,” says Matthews. “In some ways, you are investing in companies, but instead of taking equity risk with high volatility, you are buying something with a fixed coupon and a fixed maturity,” he elaborates. “Provided the company continues to make its payments and repays your capital, you know what your return is going to be.” For Matthews, the role of an active manager is clear: ensuring that the issuers will repay their debts. “We do not want the asymmetry of downside that comes with companies slipping into distress.”

The Maturation of the European High Yield Market

As a global asset manager operating in an interconnected world, where issuers are not limited by geography, Neuberger Berman has assembled a team of around 50 professionals focused on global high yield, U.S. high yield, and European high yield. Led by Simon Matthews as the lead portfolio manager for the European-focused high yield bond UCITS fund launched in 2014, the strategy is supported by four portfolio managers based in the U.S. and a research team of 29 analysts. Their approach is inherently global, as approximately a quarter of European high yield issuers are multinational companies with operations around the world, issuing debt in both U.S. dollars and euros.

Matthews highlights the significant evolution of the European high yield bond market, noting that it has matured considerably since its inception in 1997. “The market really reached maturity after the global financial crisis, when we began to see companies from a much broader range of sectors issuing bonds,” Matthews observes. Today, the European high yield market is roughly a quarter of the size of its U.S. counterpart. However, Matthews points out that despite its size, “the market offers investors a broad range of opportunities across various sectors.”

“The market really reached maturity after the global financial crisis, when we began to see companies from a much broader range of sectors issuing bonds. The market offers investors a broad range of opportunities across various sectors.”

One of the main advantages of European high yield, according to Matthews, is its relatively short average duration of less than three years. “This shorter duration means price volatility due to movements in credit spreads is lower compared to the investment-grade credit market,” he explains. “This offers a clear advantage over other markets with similar yields, while also benefiting from mark-to-market funds, transparency, liquidity, and the ability to transact – except in the most distressed securities.”

An interesting development in the European high yield market is the “growing symbiotic relationship between high yield bonds, European loans, and private credit,” according to Matthews. He notes that many companies issuing high yield bonds are owned by private equity firms, and they may choose to issue debt in the form of bonds, loans, or private credit. By being active in all three markets, Neuberger Berman gains a comprehensive view of the credit universe, which helps them make more informed and selective investment decisions.

The Importance of Experience and a Disciplined Investment Process

Succeeding in high yield bond investing requires more than just a good strategy, it requires a disciplined, repeatable, and proactive investment process. At Neuberger Berman, with a dedicated team of 50 focused on high yield – one of the largest non-investment grade credit research teams – the firm’s bottom-up credit research enables them to identify the best opportunities within the European high yield space, which includes around 375 issuers.

“While having a clear process is crucial, as many managers would agree, success also heavily depends on the experience within the team,” Matthews emphasizes. The portfolio managers at Neuberger Berman, including Matthews himself, have developed their expertise over years as credit analysts. “Having portfolio managers who have worked as credit analysts is key. A top-down approach is less relevant in high yield bond investing; we need to know these companies and their management teams on a deeply fundamental level,” he adds.

“While having a clear process is crucial, as many managers would agree, success also heavily depends on the experience within the team.”

Neuberger Berman’s high-yield bond fund maintains a relatively diversified portfolio of 150-160 individual positions, “on the higher end of what we might usually run,” according to Matthews. “We’re intentionally more diversified right now, particularly with spreads being at the tighter end of the range at the start of the year.” With the depth of their team, which can closely monitor both existing holdings and prospective opportunities, diversification becomes an advantage the Neuberger Berman team can embrace, without the risk of losing in-depth knowledge of any individual issuer.

“We aim to include names in the portfolio that we believe carry less risk than what the market is pricing in. The alpha comes from our focus on single-name credit selection.”

The team’s ultimate goal, according to Matthews, is to construct a high-yield portfolio that delivers a market-like level of yield and spread return, but with less credit risk than the broader market. “We aim to include names in the portfolio that we believe carry less risk than what the market is pricing in,” he emphasizes. “If we get this right, we should outperform over time, as we’ll see relative spread tightening in the names we own, and hopefully fewer of them will underperform.” Matthews points out that their strategy is relatively independent of whether spreads are widening or tightening, or whether the market is in a risk-on or risk-off environment. “The alpha comes from our focus on single-name credit selection.”

Sector-Specific Views and Tariff Uncertainty

While Neuberger Berman’s strategy is centered on individual credit selection, the team also takes sector-specific views, which can be particularly important in uncertain times. The ongoing tariff uncertainties under the current U.S. administration, for example, have led to performance divergence across sectors. “We are currently underweight in the automotive sector, which has been significantly affected by tariff uncertainty,” says Matthews. “On the other hand, we have a small overweight in the real estate sector.”

The tariff uncertainty has prompted a flight to safety and quality across all asset classes, including the European high-yield market. Credit spreads in this market have fluctuated significantly, widening to over 450 basis points in mid-April from a low of 293 basis points in February, and subsequently tightening closer to the 400-mark. “The key question now is whether the administration will work quickly to resolve this uncertainty around tariffs, or if this will be a more prolonged process,” asserts Matthews.

“The key question now is whether the administration will work quickly to resolve this uncertainty around tariffs, or if this will be a more prolonged process.”

The potential impact of tariffs and trade policies is a concern, and Matthews sees two plausible scenarios. If tariff uncertainty persists, the risk of a recession increases, which could lead to further widening of credit spreads. “In a recessionary scenario, we could see credit spreads move towards 450 to 500 basis points,” Matthews predicts. However, he also sees a possibility that trade resolutions or favorable economic data could bring spreads back down to more moderate levels.

European High Yield: Attractive Amidst Volatility

With credit spreads currently above 400 basis points, Matthews sees an attractive investment opportunity in European high yield. “If you have a one- to two-year investment horizon, I would say this is a good time to buy,” he says, acknowledging that some volatility is likely, especially if spreads widen further. However, Matthews does not expect the spreads to revert to the extremely tight levels seen earlier in the year.

“If you have a one- to two-year investment horizon, I would say this is a good time to buy.”

Looking beyond the uncertainty caused by tariffs, Matthews sees significant opportunities in the European market. A major infrastructure investment program in Germany, worth 500 billion euros, is expected to provide a boost to industrial sectors in Europe. “If we see a resolution to the Ukraine conflict, there could be significant improvement in sectors that have been under pressure,” Matthews concludes. “There’s potential for growth in many areas, and we’re closely monitoring them for future investment opportunities.”