Table of Contents
Some high yield market participants claim that the days of +1,000-base-point (BPS) are behind us. Citing better credit quality, aggressive fed intervention, and frequent reduction of supply, they argue that the future recession does not push high yield to the peak of 2020 or in pre -recession. But a close, data-operated examination suggests that these arguments are overstate or flawed. In fact, in the next recession, it is again spread to dissolve +1,000 BPS, which is also a mistake to easily dismiss the possibility.
During the most recent American recession, the risk premium on the default-risk-free treasury bonds rose to three times in a period of three months. Options for Ice Bofa US High Yield Index -Samson Spread vs. (OAs) widen +360 BPS on 31 December 2019, on 23 March, 2023 to +1,087 BPS. At that interval, the High Yield Index made a controversial -20.56% total return, which isonation Bofa Bofa Bofa Bofa Bofa Bofa Bofa Bofa Bofa Bofa at – 1.71%.
With that experience in the minds of institutional investors, some high yield managers are largely talking on expectations that the OAS will widen up to +1,000 BPS during the next recession. Times have changed, they say, since the recession of 1990 to 1991 and 2001, when the spread also crossed +1,000 BPS. As a great recession from 2008 to 2009, a repetition of +2,147 BPS peak spreads of that rough patch is unlikely, preventing severely.
Institutional gatekeepers are quite appropriately expecting more than the only claim that things will be different at this time. Accordingly, the high yielding aberor has made three arguments to declare that the OAS will maximize 600 to 800 bps in the next recession:
- Better high yield index credit quality than the past.
- The purpose of fed intervention is to keep the spread well below the previous maximum levels – the “fed put” hypothesis.
- The impact of the frequent reduction of high yield bond supply.
All three are admirable on his face, but no one holds a well in the exam.
Better quality than past
The underlying perception of this argument is correct. Top-tier betting-grade ratings, bonds with BB, narrow spread and are less during recession than those: B, CCC, CC, and C.[1] Therefore, if the high yield index is more concentrated in BBS than a given recession, it is as follows that the overall spread of the index in the future recession of future equivalent magnitude should decrease compared to the earlier example.
The Ice Bofa US High Yield Index has a larger BB component in fact compared to the past, which defines the past as average from the date of the installation of the index ratings through December 31, 2024. The BB share of the total market value in that period was 44.53% average. In contrast, the figure was 53.55% on April 17, 2025, which I used in the recent analysis.
April 17, 2025 BB’s share was slightly higher than only 23 March, 2020, the date of the maximum high yield OAS during the most recent recession. The base of the most recent recession creating the base is avoided by comparative problems that can arise from changes that may occur in the long -term standards of rating agencies.
For each rating category in the index, I calculated a weighted-austed OAs based on the spread of bonds within the range. Then, considering the recession of comparable quality for the recession of 2020, I implemented a weighted-aasted OAS on April 17, 2025 rating mix. The estimated index proliferation was not +600 BPS or +800 BPS, but +1,093 BPS.
On March 23, 2020, the two lowest rating categories, CC and C had small additions of projection of the last recession for high concentrations at the +1,087 bps maximum. However, the major point, it is not enough to prevent a widening for +1,000 bps or more during the next 1, about the improvement in rating mix.
Fed put
Although the legislative mandate of the Fed is to maintain stable prices in accordance with full employment-to manage dissemination-proclamation on high yield bonds-Central Bank pays attention to whether debt financing is available for companies that lack top credit ratings. The table shows the historical records displayed in the table, however, the intervention in the form of an initial decrease in the Fed Fund rate does not stop the deceased spreading in its tracks. Fed can easily prevent excessive spread of high yield as much as it would be without intervention, but not, with the experience, widening at least +1,000 BPS.
Lack of frequent supply
Like others, there is a kernel of truth in justification for lack of frequent supply. On the date of observation of our April 17, 2025, the total facial amount of the Ice Bofa US High Yield Index was $ 1.4 trillion, which was unchanged 10 years ago. To a large extent, in the last few years, the loan for private credits has been transferred to loans levied. The amount of a large new issue is required to get out of declining as bonding, calling, default, and increase in investment grade. Standing supply in front of rising investment money is a recipe for chronic overwalling that can reduce the spread of spread in the recession.
On its face, the supply-shortage argument is supported by the recent history of real proliferation on the high yield index, while compared to the appropriate values estimated by my economical model. Historically, the actual spread is often rich to rich and then from cheap to a reasonable price. From October 2022 to March 2025, however, the actual spread was less than a fair price every month, in some cases above 200 basis points. Therefore, it will not be inappropriate, therefore, to argue that when the reasonable price widens up to the next +1,000 BPS, the actual proliferation, +800 BPS is called.
In that argument, the defect arises from a pattern viewed from October 2022 to March 2025 during the period of continuous high yield overwelling. There was a fixed trend, though in a small specimen, to reduce overvilitation when the actual proliferation increases. Most dramatically, when the actual OAS was widened by the actual OAS 39 BPS in October 2023, the actual OAS vs. fair price decrease was dropped by 100 bps.
This suggests that when the next beginning of the recession causes the actual proliferation to widen hundreds of base points, the lack of supply will not serve as a firewall against convergence with a fair price of +1,000 BPS or more. Instead of being very small to meet the demand except excessive evaluation, the supply will be more sellers than buyers, which spread much more than the reasonable price.
key takeaway
There are valid arguments for a strategic allocation for high yield bonds, including their high current yield and low correlation with both investment grade bonds and equity. Strategic increase in high yield risk can be appropriate at the basis of evaluation or economic approach. Those who collect high yield assets do not need to promote the asset class, which may not stand for investigation, such as, “We will not see a +1,000-BP proliferation again.”
[1] The ratings discussed here are the ice indests composite ratings, which are obtained from the standard and the rating of the poor, of the fitch rating, and the investors of Moody, which uses a separate but parallel signaling system.
