May 20, 2025
Enhancing credit portfolios with new sources of yield
A rapid transformation is taking place in the U.S. corporate hybrid market, one that will give investors more choice in diversifying their credit portfolios—and more opportunity to potentially boost total returns in 2025.
Over the past few years, we have been constructive on hybrid capital, including non-bank preferred securities.1 While we still see opportunities in this space, we now expect the growth of the U.S. corporate hybrid market to accelerate—outpacing non-bank preferred issuance—as changes in ratings methodology spur greater market standardization, transparency and liquidity.2
For investors, this is an exciting shift. Corporate hybrids, which have a mix of bond and equity-like features, offer an opportunity to invest in creditworthy companies at higher potential yields than traditional senior unsecured bonds.
As U.S. corporate hybrid issuance ramps up, we think now is a good time for investors to become familiar with this expanding market. Today, we actually prefer the risk-return profile of this asset class, in which defaults are rare, to high yield bonds—especially for diversification purposes in clients’ extended credit portfolios.
Relative advantages: Hybrids versus high yield
Why might U.S. hybrids be attractive now? Although hybrids are riskier than investment grade senior debt, they offer key advantages when compared with high yield bonds.
These strengths include:
1. Better issuer quality: The corporate hybrid market offers access to a higher quality cohort of issuers than the high yield market: The majority of companies (90%) are rated A or BBB, translating into an investment less likely to be impacted by corporate defaults. Notably, corporate hybrids have historically experienced lower losses than European or U.S. high yield bonds during times of market stress.
Corporate hybrid* losses versus European and U.S. high yield bonds (2007–25)
Historically, corporate hybrids have experienced lower losses than European or U.S. high yield bonds during periods of market stress
Source: BofA Global Research, J.P. Morgan. Data as of April 2025. *Note: Given the longer track record of the European corporate hybrid market, we use it here as a proxy for the market as a whole. Hybrid loss rate includes losses from default, extension and special event calls.
2. Comparable yields and returns: Hybrids typically offer higher yields than an issuer’s senior unsecured debt. We think the yield increase—currently 180 basis points (bps)—is more than adequate to compensate for the additional risk.3 Today, yields on corporate hybrids are comparable to BB rated high yield bonds. Total returns have also been similar, historically, to high yield: In 2024, U.S. dollar-denominated hybrids delivered a total return of nearly 9%, on par with U.S. high yield but with much stronger credit ratings.4
3. Diversification benefits: Hybrids can be attractive diversifiers, especially now that the U.S. market is becoming more standardized and liquid. Adding corporate hybrids to an extended credit portfolio, for example, can potentially mitigate volatility given hybrids’ only moderate correlation to high yield.5 In the wake of recent ratings agency changes, we also see a larger and more diversified group of new U.S. issuers coming to market, further increasing diversification by issuer and sector.
Record Growth in U.S. Corporate Hybrid Issuance Versus Non-Bank Preferreds
In the wake of ratings methodology changes, U.S. corporate hybrid issuance has soared
Source: Bloomberg Finance L.P. Data as of December 2024. Note: Criteria excludes convertibles and includes U.S. issuers, USD denominated and both $1000 and $25 par preferreds.
Looking ahead: An expanding opportunity set
So how big could this wave of new issuance become? A quick history lesson can help us forecast the future of the market for U.S. hybrids. Before 2010, Europe’s market also featured many different types of hybrid structures, but—in the wake of greater standardization of terms and agency treatment—issuance and investor demand rose dramatically. Today, following this standardization, the European hybrids market is nearly six times larger than it was in 2013.
European Corporate Hybrid Notional Outstanding (EUR bn)
Growth in the aggregate value of the European corporate hybrid market after greater standardization
Source: J.P. Morgan. Data as of May 2025.
We believe the U.S. market has the potential to evolve on a similar trajectory. As these financial instruments become more standardized—and ratings agencies align their methodologies more closely—more U.S. companies are likely to issue hybrids as demand grows. Ultimately, as the market matures and becomes increasingly liquid, hybrids will become more familiar to investors and better represented in institutional portfolios, too.
Risks: Security selection is key
As always, thoughtful, well-informed security selection is the key to building a resilient portfolio, especially during periods of market dislocation. Investors need to remember that corporate hybrids, as subordinated debt securities, are lower in repayment priority compared with senior debt and remain exposed to extension risk.6
Additional risks include: extension risk affecting market value, coupon deferral risk with variable interest payments, special event calls due to market changes, and subordination risk leading to price volatility and lower recovery rates.
Conclusion: Dynamic market growth ahead
As the U.S. corporate hybrids market matures, we expect these securities to become a staple in extended credit portfolios thanks to their blend of high potential yields, diversification benefits and better issuer quality when compared with high yield bonds.
To learn more about U.S. corporate hybrids and how they might contribute to your portfolio, contact your J.P. Morgan team.
1We have been constructive on the preferred market for some time, but for many investors, non-bank preferreds delivered significant diversification benefits in the aftermath of the 2023 regional banking crisis.
2We foresaw this structural development in 2024, when Moody’s simplified its approach to assigning “equity credit” to corporate hybrids: Most U.S. hybrids now receive equity credit of 50%, instead of 25%, making them analogous to preferreds. Given they are more tax-efficient for companies to issue than preferreds, U.S. hybrid issuance is now surging as more issuers use them to raise capital.
3Source: Bloomberg Capital Securities–USD Non-Financial Index (USD Hybrids). We compare this pickup to relative loss rates in hybrid bonds versus senior unsecured debt in the event of default.
4Bloomberg Finance L.P. Data as of December 31, 2024. Corporate hybrids can offer investors greater reward per unit of credit risk taken, given their higher average credit rating. For example, the Bloomberg Capital Securities–USD Non-Financial Index is rated five notches higher than the J.P. Morgan High Yield Bond Index.
5Bloomberg Finance L.P., U.S. corporate hybrids’ three-year monthly correlation to U.S. high yield is 0.70.
6Hybrids are generally long dated securities, often issued with 5-10 year call dates. Issuers retain the right to not call hybrids at their first call date, typically if they can’t replace them at a similar or lower cost.
Important Information
Recent market changes have sparked a dramatic surge in U.S. corporate hybrid issuance, offering investors new opportunities for diversification and yield enhancement.
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