In the current market environment, high yield is increasingly supported by carry. With yields of around 6% in the euro market and roughly 7% in the U.S., the segment once again offers a substantial income component that could act as a buffer against short-term market fluctuations.

At the same time, spreads in both regions remain at comparatively tight levels, in the lower range of their historical bands. As a result, the return profile has shifted. Whereas, in earlier phases, spread compression contributed significantly to performance, carry is now taking on a more prominent role.

This combination of attractive carry and limited risk premia creates a tension. On the one hand, tight spreads reflect robust fundamentals, stable default expectations and continued demand for income. On the other hand, the margin for error remains limited, as unexpected shocks are less easily absorbed.

Regional differences are also evident. In the U.S., market developments are more strongly influenced by interest-rate levels, capital flows and short-term sentiment, while in the Eurozone, structural factors such as issuer composition and capital structure play a more important role. Similar spread levels on both sides of the Atlantic can therefore imply different risk profiles.

High yield: high yields, tight spreads

Carry is back – yields of the Bloomberg High Yield Index for the U.S. and the Eurozone, and for comparison the dividend yields of selected indices

Spreads are tight again – yield differentials of the Bloomberg High Yield Index for the U.S. and the Eurozone vs. respective government bonds

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 06/10/26

Overall, the environment points to a late stage of the credit cycle, in which carry is gaining in importance while sensitivity to negative surprises is increasing. To illustrate this, we have done a scenario analysis that, all else equal, showed that, over a twelve-month horizon, the euro high-yield spread could widen by up to 200 basis points and still allow for a broadly flat total return.

Scenario analysis: Effects (ceteris paribus) of a 200-basis-point spread widening in the Euro High Yield Index on the total return over twelve months

^{Sources: Bloomberg Finance L.P. DWS Investment GmbH as of 5/29/26
Calculation based on the ICE BofA Euro High Yield Constrained Index, with an effective yield of 4.9%, an OAS of 262 bps, an effective duration of 2.98, a spread duration of 2.96, and a remaining maturity of 3.4 years}

Fundamentals in the high-yield segment continue to present a broadly solid picture, but dispersion is increasing. While higher-rated issuers benefit from more stable access to capital markets and more resilient financing structures, lower-quality segments are becoming more sensitive to financing costs and macroeconomic developments.

Risk dynamics are also evolving. While default rates remain moderate, investors are currently placing greater emphasis on differentiation between issuers, sectors and capital structures. For actual loss dynamics, it is often not so much the number of defaults that matters, but rather the level of recoveries and the underlying capital structure. This is particularly true in an environment of tight risk premia.

The primary market is playing an increasingly important role in price discovery. Adjustments in risk premia are occurring less through abrupt corrections in the secondary market and more via issuance conditions and the market’s capacity to absorb new supply. A growing share of market adjustment is thus taking place in the primary market, where new issue premia and placement conditions are key to price formation. Rising issuance volumes, particularly in the U.S., are meeting fundamentally stable but more volatile demand.

Technical factors therefore remain supportive, but less unambiguous than in earlier phases of the cycle. Capital flows, liquidity conditions and primary market activity can have a stronger short-term influence on market movements, underscoring the importance of continuous market monitoring.

Primary-market developments in high yield (gross issuance volumes)

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 6/12/26

A key difference between the two main markets lies in the composition of the investable universe. The European high-yield market structurally features a higher share of BB-rated issuers and lower exposure to lower-rated segments, whereas the U.S. market is more heavily skewed toward riskier issuers.

Spread levels have recently converged and are currently at similar levels. Against the backdrop of the structurally higher quality of the European market, this convergence is notable and shifts the focus toward differences in capital structures and sector composition. While the U.S. market is more influenced by growth-oriented, higher-leverage business models, the European market appears more broadly diversified and, on balance, more resilient.

For investors, this means that similar yields do not necessarily imply similar risks. As spreads compress further, the quality and structure of the respective market, as well as selective issuer selection, become increasingly important.

Rating distribution in high yield: Europe vs. U.S. (Bloomberg composite ratings)

^{Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 06/12/26}

High yield and private credit differ fundamentally in how credit risks are originated, assessed and managed within a portfolio.

High-yield bonds are part of a public capital market characterized by continuous price discovery, a broad investor base and generally available liquidity. Risks are continuously reflected in spreads and prices, making them transparent and visible at a relatively early stage.

Private credit, by contrast, is based on direct lending outside public markets. Financing structures are individually negotiated, including covenants, collateral and maturities. Valuations are typically done periodically and based on models, which dampens short-term volatility but may lead to delayed adjustments.

The key difference therefore lies less in the overall level of risk than in the transparency and speed of risk assessment. While short-term fluctuations are visible in high yield, risks in private credit often become apparent only with a lag.

Liquidity differences are also pronounced. Private-credit investments are typically long-term and have limited tradability, whereas liquid high-yield markets allow for active position management – albeit at the cost of higher short-term volatility.

Market composition is also becoming increasingly important. While high yield is shaped by continuous price discovery and integration into capital markets, private credit is more strongly driven by bilateral relationships and supply–demand dynamics within narrower investor groups.

A key and often underestimated difference lies in sector composition. This is particularly evident in the software sector: while its share in the high-yield universe in both Europe and the U.S. remains relatively small, it is significantly more prominent in private credit and leveraged-loan markets.

Against the backdrop of current developments in artificial intelligence, this aspect has gained further importance. Uncertainty about which business models will prove sustainable over the long term has recently led to increased volatility, particularly in software-heavy segments. From this perspective, high yield appears less exposed to such sector concentration risks.

Software exposure significantly higher in the private credit segment (using leveraged loans as a proxy)

^{Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 06/13/26
U.S. Leveraged loans = Morningstar LSTA US Leveraged Loan Index USA, Euro Leveraged loans = Morningstar European Leveraged Loan Index EUR, U.S. High Yield = ICE BofA US High Yield Constrained Index USD, Euro High Yield = ICE BofA Euro High Yield Index EUR}

Private credit remains a relevant component of many credit allocations but is being assessed more selectively in the current environment. Factors such as liquidity, valuation mechanics and dependence on underwriting quality are gaining importance.

Rising interest rates are testing more highly leveraged business models in particular, but should primarily be seen as a normalization after an unusually favorable financing environment. Against this backdrop, private credit appears less as a substitute and more as a complementary addition to liquid credit markets.

Within the liquid credit universe, subordinated bank capital instruments such as AT1 bonds (CoCos) also play an important role. With yields slightly above the broader high-yield market, they could serve as a targeted carry component within a credit portfolio. At the same time, the segment remains sensitive to periods of increased risk aversion and requires selective allocation and a clear understanding of the underlying capital structure. For investors, this results in an expanded set of credit building blocks, where not only segment selection but also structure, liquidity and risk transparency are key considerations.

The return of CoCos (total return per calendar year)

^{Sources: Bloomberg Finance L.P. DWS Investment GmbH as of January 2026
EUR High Yield = ICE BofA Euro High Yield Index EUR, EUR CoCos = ICE EUR Contingent Capital Index}