BlackRock’s Mitchell Garfin is still finding areas of opportunity in a high-yield bond market that looks expensive. Some investors, like Pimco chief investment officer Dan Ivascyn , have been moving into higher-quality bonds amid economic uncertainty and what they see as the lack of reward for taking on risk. “I’m not too concerned about the overall state and health of the economy,” said Garfin, co-head of U.S. leveraged finance at BlackRock. “Clearly we’re going to need to see what the data looks like over the next few months, next few quarters. But given what we know now, we’re still reasonably constructive on the market.” Garfin, along with David Delbos, manages the $27.5 billion BlackRock High Yield Fund (BHYIX) , which has earned four stars from Morningstar. The fund’s total returns over the trailing one-, three-, five-, 10- and 15-year periods have been in the top quartile of its peer group, per Morningstar. In June 2024, BlackRock launched an exchange-traded fund version of the offering, also actively managed by Garfin and Delbos. The iShares High Yield Active ETF (BRHY) has a 30-day U.S. SEC yield of 6.18% and a net expense ratio of 0.45%. BRHY mountain 2024-06-17 iShares High Yield Active ETF’s performance since its June 14, 2024 inception. Garfin anticipates continued rockiness in the market as economic data comes out. However, he expects spreads will stay around these levels and said there may even be room from some spread tightening — although it won’t be in a straight line. Spreads refer to the difference in yield between two bonds with different credit qualities. When spreads tighten, that means this difference in yield is shrinking. “We do think with monetary policy moving to an easing bias probably in September, maybe two or three eases for the balance of this year, that could further augment total return potential in our asset class,” he said. On Friday, Federal Reserve Chair Jerome Powell indicated rate cuts may be possible, although he noted there has been a high level of uncertainty. Fed funds futures pricing data is now suggesting an 85% chance of a rate cut at the central bank’s September meeting, according to the CME FedWatch tool . What Garfin likes right now The “sweet spot” right now within high yield is the B-rated portion of the market, Garfin said. The BlackRock High Yield Fund (BHYIX) currently has nearly 45% of its assets in B-rated bonds, as of July 31. “Higher quality credit BBs fundamentally [are] generally pretty sound, [with] strong and resilient balance sheets. The issue, however, is the relative value there,” Garfin said. “As I think about what’s the most efficient use of our clients’ capital, it’s investing in the mid-quality portion in the market.” Bonds that are rated BB+ or lower at Standard & Poor’s and Fitch, and Ba1or lower at Moody’s, are considered high yield. In the CCC-rated, or lower quality, part of the market, Garfin is picking his spots and avoiding the more distressed parts. In addition to focusing on credit quality to find value, he also looks at specific sectors. These days, he’s leaning into sectors that are not significantly affected by tariffs. One area he likes is technology — specifically on software companies. One of BHYIX’s top holdings is in Cloud Software Group. The businesses “generally have fairly consistent cash flow generation, generally have very strong recurring revenue streams that allows these software companies to take on more debt,” he explained. Garfin is also overweight insurance brokers, mainly in the property and casualty business. The sector has sticky revenue streams, fairly robust margins and strong free-cash-flow generation, he added. Insurance broker Hub International is among BHYIX’s top holdings. Lastly, the aerospace and defense sector is attractive, thanks to its strong pricing power, Garfin said. “The backlog for manufacturing of aircraft is very, very high — out two, three, four years,” he said. “So if you think about earnings power over that period of time, there’s a real clear path to revenue generation and cash flow generation as a result of that.