Chart No. 212
Credit
6 min read
Free
Spreads price no recession. Defaults disagree.
High-yield spreads sit at 312bp, the tightest since 2007, while defaults run at 3.9%. Either the market is wrong, or the default cycle is.
Nadia Brennan
Founder and editor
Illustrative data based on public sources.
HYG · JNK · US HY OAS
High-yield spreads closed the week at 312 basis points over Treasuries. That is the tightest level since the summer of 2007, and it is tighter than at any point in the last default cycle.
What the spread is supposed to pay for
A spread is a price for two things: the chance you don’t get paid back, and the inconvenience of owning something you may not be able to sell. At 312bp, investors are being paid roughly 3% a year for both. With trailing defaults at 3.9% and recoveries near 40%, expected losses alone eat about 2.3% of that.
Why it can stay tight
The high-yield market is better than it was. More than half of it is rated BB, issuers termed out their debt in 2021, and the riskiest borrowers moved to private credit. The index you buy today is not the index of 2007.
The trade-off
Tight spreads are not a signal to sell everything. They are a signal that the margin of safety is thin. If you own high yield, own the BBs, keep duration short and keep some powder dry for the week the market remembers what a default looks like.
Not investment advice. Carry writes about markets; it does not tell you what to buy or sell. Charts use illustrative data unless a source says otherwise.
