Dec 10 (Reuters) - A lower rung of U.S. junk bonds is

set to deliver its best returns in eight years in 2024,

underscoring a significantly higher risk-return payoff for

investors dabbling in speculative assets this year.

Returns on CC-rated debt, two rungs above D - meaning in

default, have surged nearly 48% this year, a far cry from 83% in

2016 but nearly three times higher than last year, according to

data from Morningstar Direct.

In comparison, investment-grade credit has generated returns

between 3% and 5% this year, while other junk bond tiers have

yielded returns between 7% and 15%.

Investment-grade bonds are generally perceived to be safer,

but their lower risk and greater stability mean lower returns

than often illiquid high-yield bonds.

This year's outperformance by high-yield bonds has been

driven by stronger corporate profitability and a soft economic

landing that has kept default rates near historic lows and

supported strong recovery rates, Bob Michele, global head of

fixed income at JPMorgan Asset Management, said.

"It has been a very good year for credit," Michele told the

Reuters Global Markets Forum (GMF).

"Areas that stood out to us were the performance of bank

debt, especially AT1, and the performance of high yield," he

added. AT1, or additional tier one bonds, are designed to act as

shock absorbers that can be written off or converted into equity

if a bank's capital levels fall below a certain threshold,

providing a cushion at times of market turmoil.

Despite record-tight spreads in corporate bond markets,

asset managers remain bullish on U.S. fixed income, bolstered by

President-elect Donald Trump's election victory and the

Republicans' control of the House and Senate, which are expected

to reinforce pro-growth policies and further support risk

assets.

"Spreads across risky assets are extremely tight and worth a

second look for investors, but the favourable growth and labour

market environment have continued to make it difficult for

investors to step away," Gennadiy Goldberg, U.S. rates

strategist at TD Securities, told the GMF.

The ICE BofA high-yield index, which tracks the performance

of junk bonds, has hit record highs above 1,736 this

week and is heading for a rise of 9.7% in 2024.

(Join GMF, a chat room hosted on LSEG Messenger, for live

interviews: https://lseg.group/3KFHrhe)