As the Fed moves deeper into its easing cycle and US growth shows signs of moderation, few investors are watching the implications for credit as closely as Mitchell Garfin.
He’s BlackRock’s co-head of US Leveraged Finance and co-portfolio manager of the $27.1 billion BlackRock High Yield Fund (BHYIX), which Morningstar recently named one of the top-performing high yield bond funds.
Garfin’s perspective offers a window into how an active manager is navigating a market defined by dispersion and selective opportunity and he’s been speaking with InvestmentNews.
“We expect the Fed to continue easing amidst moderating growth, a backdrop that historically supports tighter spreads and positive returns for high yield,” says Garfin. “Our positioning emphasizes strong carry, diversification, and managing downside risk. We remain selective, favoring credits with solid fundamentals and recurring revenue streams.”
At the same time, he and his team are steering clear of the riskiest corners of the high yield market (CCCs yielding over 10%) as many issuers in this cohort are most susceptible to headwinds from slowing growth.
Garfin believes that the next stage of the cycle will reward precision.
“Dispersion creates both risk and opportunity, making active management critical. Advisors should prioritize managers with robust research capabilities to identify credits that can outperform as fundamentals diverge,” he says. “Security selection matters just as much, if not more, than beta exposure, as winners and losers will be increasingly pronounced. Allocating to strategies and managers that embrace flexibility and deep credit work can help capture alpha — both of which have been cornerstones of our all-weather approach.”
Despite relatively tight spreads, Garfin still sees attractive opportunities for income-seeking investors.
“While spreads screen on the tighter end of historical levels, structural changes in market composition suggest valuations are less stretched than they seem,” he notes. “The market yields just inside 7% and provides a meaningful cushion against moderate widening, making carry a key driver of returns.”
Garfin added that “the best opportunities lie in issuers with improving credit profiles and sectors benefiting from secular growth trends. Currently, we believe single Bs and the higher quality portion of the CCC cohort are most attractive compared to areas like BBs, which we believe offer less compelling relative value.”
Within sectors, Garfin’s conviction is strongest in areas with stable and recurring revenue streams.
“Both software and insurance brokers offer resilient cash flows and defensive characteristics amid slowing growth,” he says. “Software benefits from recurring revenue models and strong pricing power — we’re focused on enterprise software tied to mission-critical operations.”
He also emphasized the appeal of insurance brokers, particularly those in the property and casualty space.
“We favor brokers that have stable demand and low capital intensity. These attributes support attractive risk-adjusted returns even in a more volatile macro backdrop,” he says.
More broadly, Garfin views these industries as structural winners: “Both sectors provide sticky revenue streams, robust margins, strong pricing power, and solid cash generation — fundamentals that stand out relative to more cyclical areas.”
By contrast, Garfin remains wary of consumer-facing and cyclical sectors.
“Consumer-exposed and cyclical sectors face margin pressure from slowing demand and persistent input cost volatility,” he warns. “Leverage levels in some issuers remain elevated, increasing vulnerability if growth decelerates further.”
He points to retailers and consumer products as particular areas of concern. “These sectors have high fixed operating costs, limited pricing power, and outsized exposure to labor and wage pressures, making them most vulnerable to an economic downturn.”
That said, Garfin remains open-minded: “We would reassess our cautious stance if fundamentals improve or valuations compensate for downside risk.”
Garfin also sees technical support from a broad-based refinancing trend.
“The current refinancing wave is extending maturities and reducing near-term default risk, reinforcing strong credit fundamentals. Issuers are proactively addressing 2027–2028 maturities, which continues to limit maturity wall concerns.” he says. “There is healthy [investor] demand for these deals, with the majority of new issues multiple times oversubscribed. Defaults are expected to remain well below historical averages due to the favorable technical backdrop, leverage near historical lows, and solid interest coverage levels across most of the market.”
Managing a $27 billion portfolio requires constant vigilance.
“We balance yield and risk through broad diversification across ratings, sectors, and issuers. Core high-yield exposure is complemented by tactical allocations to bank loans and select investment-grade credits to capitalize on relative value,” he explains. “Rigorous credit selection, position sizing, and stress testing — alongside our Risk and Quantitative Analytics team — help mitigate downside risk.”
As dispersion increases, Garfin sees opportunity for active investors.
“We leverage deep fundamental research and issuer engagement to uncover credits where market pricing misaligns with intrinsic value,” he says. “Elevated dispersion often stems from technical factors or short-term sentiment, creating opportunities for disciplined investors.”
His process, he added, is grounded in fundamentals: “Our focus is on cash flow durability, covenant strength, and catalysts for credit improvement.”
Looking across fixed income sectors, Garfin believes high yield continues to play a strategic role.
“High yield remains a core component of diversified fixed income portfolios, offering compelling income and lower duration than investment grade,” he says, adding that compared to other asset classes, “high yield provides solid carry with greater upside convexity than loans, while loans offer floating-rate exposure and potentially lower volatility. Private credit can complement high yield for investors seeking illiquidity premiums, but it requires a longer horizon and tolerance for complexity.”
Garfin expects high yield to maintain its appeal well into next year: “For the duration of 2025 and into 2026, we expect high yield to benefit from solid issuer fundamentals and active management opportunities as dispersion persists. For investors prioritizing flexibility and liquidity alongside attractive income, high yield continues to stand out as a strategic allocation.”
Garfin’s says that high yield fundamentals remain solid, technicals are supportive, and yields provide a meaningful buffer against downside catalysts.
“Elevated dispersion underscores the importance of active management and rigorous credit work,” he says. “Advisors should view high yield as a strategic allocation rather than a tactical trade. The asset class offers attractive income characteristics combined with significantly improved credit quality — BBs have grown from around 35% to nearly 50% of the market, while CCCs have declined from about 20% to 12%.”
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