Market Overview: Priced for Perfection
The public high-yield bond market has entered a state of aggressive valuation, characterized by spreads tightening to levels rarely seen in the post-Global Financial Crisis era. As of mid-December 2025, the ICE BofA US High Yield Index Option-Adjusted Spread has compressed to 291 basis points. This figure represents a significant tightening from earlier in the year and places current valuations in the richest decile of historical data.
This compression signals a decisive “Risk-On” sentiment across capital markets. Investors, emboldened by the Federal Reserve’s pivot toward easing and a consensus belief in a soft economic landing, are eagerly deploying capital into riskier assets. The prevailing narrative is one of optimism: corporate earnings remain resilient, and the feared wave of defaults has largely failed to materialize, keeping default rates near a manageable 1.5% to 2% range.
The Refinancing Wave and liquidity
For corporate borrowers, the current environment offers a rare window of opportunity. With borrowing costs effectively subsidized by fierce investor demand, issuers are prioritizing balance sheet management over aggressive expansion.
- Refinancing Dominance: The majority of new issuance—estimated at over 70% of year-to-date volume—is being allocated to refinancing existing debt. CFOs are aggressively addressing the “maturity wall,” pushing obligations further into the future while rates are attractive.
- Covenant Erosion: In their haste to secure allocations, public market investors are accepting looser terms. We are observing a resurgence of “covenant-lite” structures, reduced protections, and narrower premiums for illiquidity.
- Private Credit Competition: Despite the rally in public bonds, institutional capital continues to flow into private credit. However, the liquidity premium between public and private markets has compressed, forcing investors to be increasingly selective to generate alpha.
The Bond Capital Perspective: Discipline Amidst Exuberance
While the tightening of spreads is a boon for borrowers with access to the public markets, it presents a complex landscape for disciplined lenders. When valid credit risk is priced at fewer than 300 basis points over Treasuries, the margin for error effectively vanishes. The market is priced for perfection, leaving little buffer for exogenous shocks or sector-specific downturns.
At Bond Capital, we view this environment through a lens of caution. While banks and public funds aggressively loosen terms to win deals in a crowded market, we maintain strict credit discipline. We do not chase yield by sacrificing structure. Instead, we focus on the middle-market borrowers who may be overlooked by the index-hugging giants or who require more bespoke capital solutions than the public market can provide.
What this means for Borrowers: If you have access to public high-yield markets, now is the time to execute. The window is wide open. However, for those seeking certainty, flexibility, and a relationship-focused lender that looks beyond the daily fluctuations of spread indices, private credit remains the superior strategic partner. We continue to prioritize downside protection, ensuring that our capital is deployed into businesses with sustainable cash flows, regardless of the temporary exuberance of the public tape.
