The Lead: Use of Proceeds? Optimization.
The US High Yield market is signaling aggressive optimism as we close out 2025. According to the latest data from the ICE BofA US High Yield Index, option-adjusted spreads (OAS) have tightened effectively to 288 basis points. This sub-300bps level represents a highly confident—perhaps exuberant—market environment where risk premiums have largely evaporated in the hunt for yield.
Investors are currently pricing assets for a perfect economic soft landing. The compression is evident across the quality spectrum, indicating a robust appetite for credit risk despite lingering macro uncertainties. In this environment, capital is abundant for issuers who can access the public window, often at terms that heavily favor the borrower over the lender.
Sector Watch: The Dash for Trash
The rally has extended deep into the credit curve. The spread on the highest-risk tier, the CCC & Lower Index, has tightened to 877 basis points. While this segment remains volatile, the recent compression suggests that investors are forcing their way down the quality ladder to generate returns, accepting thinner margins of safety.
Meanwhile, the upper echelon of the junk market is trading with near-investment-grade tightneess. BB-rated bonds are trading at a spread of just 1.81% (181 bps). This extreme compression in the BB bucket indicates that the market views these corporates as virtually insulated from default risk in the near term.
- US High Yield Index OAS: 2.88%
- Single-B OAS: 2.97%
- BB Index OAS: 1.81%
The Implication: Discipline in an Overheated Market
For borrowers, the current window offers an exceptional opportunity to refinance existing debt or fund aggressive expansion at attractive rates. Public capital markets are currently prioritizing deal volume over structural protection.
However, this “Risk-On” euphoria creates a dichotomy in the lending landscape. While banks and public syndicates loosen covenants to win competitive mandates, Bond Capital maintains a divergent thesis. Markets priced for perfection leave zero room for error. When spreads are this tight, the compensation for risk often fails to match the downside reality of an economic cycle turn.
We remain active but highly selective. We do not chase terms to the bottom. Instead, we focus on senior-secured structures where the fundamentals make sense regardless of market sentiment. For investors, this discipline provides a hedge against the inevitable widening that follows periods of exuberance; for borrowers, it offers a partner who remains steady when the public “fair-weather” window eventually shuts.
