High-Yield Market Signals Aggressive Risk Appetite
The public high-yield bond market is signaling a decisive “Risk-On” environment as we close out the year. As of December 11, 2025, the ICE BofA US High Yield Index Option-Adjusted Spread (OAS) has tightened to 2.88% (288 basis points). This level, significantly below the historical average and breaching the psychological 300-basis-point floor, indicates that public market investors are aggressively accepting lower risk premiums in exchange for exposure to corporate credit.
Alongside tight spreads, the effective yield for the index stands at 6.60%. While decent in nominal terms compared to the proceeding decade, the primary driver of total return today is spread compression rather than coupon income. This behavior suggests a market priced for perfection, where investors are betting that corporate default rates will remain benign despite any lingering macroeconomic headwinds.
Sector Divergence: The Quality Tiering
While the aggregate market is frothy, a closer look at credit tiers reveals where the specific risks lie. Single-B rated issuers—often considered the “sweet spot” for high-yield investors looking for carry—are trading with spreads of just 2.97%. This indicates that the market views these companies as relatively safe bets, pricing them almost in line with the broader index.
However, the distress risk is not entirely absent. The CCC & Lower Index spread remains elevated at 8.77%. This significant gap suggests that while capital is abundant for stable businesses, the market retains a healthy skepticism toward deeply distressed balance sheets. Investors are chasing yield, but they are not entirely blind to solvency risks.
The Bond Capital Perspective: Discipline Over Deal Heat
In a market environment where spreads are sub-300bps, public debt markets often prioritize speed and loose execution over protective structuring. Lenders and bond buyers, desperate to deploy capital, may accept “covenant-lite” terms that strip away creditor protections.
For borrowers, this is an attractive window to refinance publicly if they can access it. However, for investors, this is the moment when discipline matters most. At Bond Capital, we view these tightenings with caution. We do not loosen our credit standards simply because the public market has. Instead, we continue to focus on private credit opportunities where structure, security, and partnership drive the returns, rather than relying on the fleeting sentiment of a bull market rally.
