When Boots came to the market this summer to finance its $4.5 billion buyout by Sycamore Partners, investors who took the sterling tranche were paid handsomely for doing so. The UK portion of the deal offered spreads a full 125 basis points wider than equivalent euro and dollar papers, despite carrying identical credit risk.
For investors prepared to hold sterling-denominated bonds, that kind of extra yield has become something of a hallmark of the UK high-yield market.
Sterling high-yield bonds have long been overlooked, but they have quietly built a reputation for delivering stronger returns than their European and US counterparts. Technical quirks of the market — smaller size, issuer concentration and restrictions that prevent many institutional investors from participating — create inefficiencies. These inefficiencies (notably a high liquidity premium) can translate directly into higher returns and useful diversification.
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High yield performance numbers tell the story
Over the past 20 years, $100 invested in UK high yield would have grown to $660. The same investment in US high yield would be worth just $350. That difference, an annualised 9.7% return for the UK market, underlines the long-term power of its compounding yield advantage.
The premium is real and persistent. At the end of August, the FTSE Sterling High-Yield Bond Index carried an average coupon of 6.89%, but yield to maturity was nearly 9%. Most of the bonds sit between B- and BB in terms of ratings, with a technical tenor of five and a half years, though in practice, refinancing often comes much sooner. On a risk-adjusted basis, UK bonds trade cheaper than US high yield, where spreads sit around 290 basis points. The result is a market where investors are consistently paid more for the same level of credit risk.
Market size is part of the equation
With only about £30 billion outstanding, the sterling high-yield universe looks tiny compared with the €400 billion European market. This creates a liquidity premium for sterling bonds. Further, the UK central bank has tended to maintain higher policy rates than its European counterparty, setting a higher benchmark from which corporate rates are set. To illustrate this, the Bank of England base rate currently stands at 4%, double the ECB’s policy rate of 2%.
Restrictions also matter. Many institutional investors cannot own sterling-denominated credit due to mandate wording or operational limits. That leaves a structural imbalance between supply and demand, keeping yields higher for those who can access the market. For flexible investors, it remains a straightforward way to harvest additional returns without taking on extra credit risk.
The broader backdrop is also supportive. Years of near-zero rates in the 2010s suppressed yields, but central bank tightening since 2021 has transformed the landscape. Even with US rate cuts already underway and the UK expected to follow in November, corporate bond yields remain far above pre-pandemic levels. Issuers such as Ocado LON:OCDO underline the point: its latest five-year bond came with a coupon of 11%, compared with just 3.875% on its previous deal.
High yield demand is back as well
Pension funds and insurers are once again allocating to credit, as the cash flows now comfortably match liabilities. Retail investors, who largely ignored bonds when yields were negligible, have also returned to the market in the past few years.
For investors willing to look past the technical quirks, sterling high yield offers far more than a spread pickup. The Boots deal may have been the latest illustration, but the track record spans decades. Sterling high yield has consistently beaten its global peers and continues to be an interesting option for long-term credit allocations.
