US High-Yield Credit Strategy: July High Yield and Loan Market and Factor Review

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05 Aug 2026 12:07:20 ET │ 20 pages

US High-Yield Credit Strategy

July High Yield and Loan Market and Factor Review

CITI'S TAKE

July was a volatile month, with Energy and AI dynamics dominating

narratives. High yield underperformed loans — the Bloomberg High Yield

Index returned -0.25% against the LSTA Leveraged Loan Index's +0.79% —

before rebounding sharply into month-end on geopolitical de-escalation

and easing oil prices, mirroring the early-month weakness and late recovery

pattern seen in May and June.

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Michael H Anderson AC

Steph Choe, CFA AC

High Yield — Our factor recommendations lagged the Bloomberg High Yield Index

by -4.3bp. AI (overweight, -2.1bp) and Communications (overweight, -2.1bp) were

the primary detractors; we flipped AI to underweight on July 29th given fading

crossover demand and rising credit risk in the data center build-out. Regular Way B

(+1.2bp) and Energy underweight (+0.8bp) were the largest positive contributors.

Loans — Our recommendations underperformed the Tracker by -0.9bp, leaving YTD

outperformance at +12.6bp. Software (underweight, -2.8bp) reversed its June

contribution sharply as the sector mean-reverted. B+/B discount overweight

(+1.6bp) partially offset the drag, capturing the month's rotation into near-par, lightdiscount loans.

Asset Allocation — Our 45:55 HY/loan allocation, set on June 24th, proved wellpositioned as loans outperformed high yield for the month. AI-related volatility is a

growing risk to watch, with the factor carrying greater index weight in high yield

(~3%) than in loans.