With high-yield credit spreads hovering near all-time lows, some investors may be tempted to sit on the sidelines until spreads have widened before investing. We think that could be a mistake. In fact, we see a compelling case for investing in the high-yield market today, despite narrow spreads. Here’s why.
1. Spreads Are Tight Because of Good News
The biggest reason that spreads are so narrow today is that economic news has been good. Sustained economic growth has made the possibility of recession seem more remote. Strong fundamentals also play a role, as companies have fortified their balance sheets and locked in lower interest expenses in the years since the COVID-19 pandemic. As a result, defaults have been modest, running below their historical averages—and below Street expectations.
Meanwhile, attractive yields have stoked demand in the global high-yield market as investors try to capitalize on higher potential returns and lower perceived risks. By contrast, on the supply front, companies have focused more on reducing debt than on using it for growth or acquisitions. As a result, demand has been outstripping supply, creating a favorable technical backdrop that supports prices and keeps spreads tight.
Debt reduction has also caused the average maturity of the Bloomberg US Corporate High Yield Index to shorten to record lows (Display). Consequently, both the index’s average duration and its “spread duration”—the sector’s price sensitivity to changes in spread levels—are below historical averages.
