Year-End Rally Compresses High-Yield Spreads to Historic Lows
The public high-yield markets are closing 2025 with a definitive “risk-on” signal. As of December 24, the ICE BofA US High Yield Index Option-Adjusted Spread has tightened to 2.84%, dropping from 2.95% just a week prior. This compression brings borrowing costs for sub-investment grade issuers to levels typically associated with peak economic optimism, reflecting a market that is aggressively pricing in a “soft landing” and anticipating robust corporate earnings in 2026.
Investors, eager to lock in returns before the year closes, are chasing yield down the credit spectrum. The spread on the Single-B US High Yield Index has fallen to 2.96%, breaking below the psychological 3.00% barrier. Meanwhile, higher-quality BB-rated bonds are trading at a spread of just 1.72%, indicating that public market investors currently perceive very little systemic default risk.
The “Priced for Perfection” Environment
Current spread levels below 300 basis points suggest that public credit markets are priced for perfection. In this environment, capital is abundant and accessible for rated borrowers, often accompanied by looser covenants and borrower-friendly terms. The rapid tightening observed between December 18 and December 24—where spreads compressed nearly every day—highlights a momentum-driven chase for assets rather than a fundamental repricing of risk.
While this offers an attractive window for public issuers to refinance debt at lower margins, it creates a fragile ecosystem. With risk premiums at historical lows, there is little buffer to absorb negative macro shocks or earnings misses. The market has effectively declared that corporate distress is off the table for the immediate future.
The Bond Capital View: Discipline Over Momentum
While the public rally lowers the cost of capital for broadly syndicated deals, it often masks underlying credit weaknesses. In an overheated market where banks and public funds compete aggressively for volume, deal structures tend to weaken, stripping lenders of critical protections.
Bond Capital views this compression with caution. We do not chase yield by sacrificing structural integrity. When public markets become exuberant, the discipline of private credit becomes a crucial differentiator. We continue to focus on senior-secured opportunities where terms are dictated by prudent risk management—not by a fear of missing out on a year-end rally. For savvy borrowers, the public market offers cheap execution today, but private credit continues to offer the certainty of execution and relationship stability that endure when market sentiment inevitably turns.
