Public Markets Priced for Perfection
The public high-yield bond market is signaling extreme optimism as 2025 draws to a close. According to data from the Federal Reserve Bank of St. Louis, the ICE BofA US High Yield Index Option-Adjusted Spread (OAS) has tightened to 2.88% (288 basis points). This continuing compression represents a market priced for perfection, where investors are effectively ignoring macroeconomic headwinds in a scramble to secure yield before year-end.
Historically, spreads below 325 basis points indicate an overheated Risk-On environment. In this scenario, capital flows freely and issuers often dictate terms. While this reduces immediate borrowing costs for corporations, it often comes at the expense of creditor protections, as covenants are loosened to attract volume.
The Compression in Quality
The rally is most evident in the higher-quality tiers of the junk bond market, yet the thirst for yield is pushing investors further down the credit curve. The ICE BofA BB US High Yield Index OAS has tightened aggressively to just 1.81%. With double-B paper offering such meager returns over Treasuries, capital is being forced into riskier assets to generate meaningful alpha.
Consequently, we are seeing compression in the single-B cohort as well, with the ICE BofA Single-B US High Yield Index OAS tightening to 2.97%. The narrowing gap between BB and single-B tiers suggests that public market investors are currently underpricing credit risk, prioritizing immediate deployment over downside protection.
What This Means for Borrowers
For borrowers, the public window is wide open, but primarily on price. While banks and public funds are aggressively loosening terms to win deals in this tight-spread environment, this liquidity is often fleeting. It relies on continued market stability and low volatility.
At Bond Capital, we view these ultra-tight spreads as a signal to exercise caution rather than aggression. While public markets chase aggressive pricing with loose covenants, we maintain our credit discipline. We focus on robust deal structures that protect capital through full market cycles, rather than chasing the momentary highs of a year-end rally. For partners seeking certainty of execution and structurally sound capital, private credit remains the stable alternative to the fickle nature of public market sentiment.
