Key points to focus on in high-yield investing: Strategist

Has the debate on whether the economy is dead set on falling into a recession or if the Federal Reserve can pull off a soft landing reached its peak? Several leading names, like DoubleLine Capital Founder Jeffrey Gundlach, are certain that recession signals have already gone off, doubting that the central bank would raise rates again. If this were true, it leaves investors wondering what this means for high-yield market investing.

David Forgash, PIMCO Head of Leveraged Credit, joins Yahoo Finance to discuss what investors should pay attention to during these times of uncertainty.

Forgash points out favorable terms for investing in high-yield environments: "You can invest in a very resilient portfolio of high-yield credits — Double B's — so just below investment grade, and have a 8-8.5% yield. Which is very attractive if you think about it because the long-term average for this, where defaults are very low for Double B's, it means that you will have some of the highest after-default yields or the highest locked-in yields, really since the Great Financial Crisis."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JOSH LIPTON: And Dave, are there certain sectors that look more attractive to you right now? Is it energy, or retailers, or real estate?

DAVID FORGASH: Yeah, well, you think about energy in the past and that was always the area where there was the most strife as far as defaults. They had levered balance sheets. That's actually not the case right now.

There were some defaults that took place after COVID, but they've actually done quite well as far as taking down the risk in those balance sheets, in other words paring down their debt. They're actually some of the best performing credits this year in the high-yield market. And energy, that we've seen a lot of them move up, which is what we call a rising star, so move from high yield into investment grade. So energy is in a pretty good spot.

There are some other sectors that are concerning. Those are sectors that borrow quite a bit of money for CapEx. So you think about telecom, cable, those types of companies that borrow a lot and have locked in either high rates now or will need to continue to fund in higher-rate environments in order to pursue that CapEx. That's where the issues are generally going to be centered as we enter this next year and we're already seeing some of it right now.

AKIKO FUJITA: So certainly a lot of investors looking to put some of their money to work on that front. You mentioned energy as one place, what are some other sectors where you're seeing attractive yields?

DAVID FORGASH: Yeah. Well, let's just talk about yields in general then. So if you talk to-- if we talked about where we were just when the Fed started raising rates, high yield was at 4%. That's a very un-high-yield level. It's kind of like driving a car uphill at a very smooth road, but you just don't know you're not really getting anywhere.

Currently, and if you wanted to get real rates or real returns, you'd have to go out to triple Cs, which are, as you know, the riskiest area in high yield. Now you can invest in a very resilient portfolio of high-yield credits, double Bs, so just below investment grade, and have a 8.5% yield, 8%, 8.5% yield, which is very attractive if you think about it. Because the long-term average for this where defaults are very low for double Bs, it means that you will have some of the highest after-default yields or the highest locked-in yields really since the great financial crisis. So it is a very attractive time to invest generally speaking.

JOSH LIPTON: David Forgash from PIMCO. David, thank you so much for your time and insight today. Appreciate it.

DAVID FORGASH: Happy to be here.