The Calmest Signal in the Market Is a Warning
High yield OAS at 2.70 is historically tight. Tight spreads have led equity trouble more often than they have guaranteed safety.
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The Calmest Signal in the Market Is a Warning
High yield OAS at 2.70 is historically tight. Tight spreads have led equity trouble more often than they have guaranteed safety.
MICHAEL A. GAYED, CFA
Key Highlights
- The ICE BofA US High Yield OAS stands at 2.70 as of Sep 10, near multi-decade lows.
- Tight spreads mean credit investors are being paid almost nothing for default and downgrade risk.
- Credit has historically turned ahead of equity: the 2007 and 2021 cycles both showed spread bottoming months before the equity peak.
- A 2.70 spread leaves no cushion for repricing, which is different from predicting a repricing.
The surface story is a healthy credit market supporting a healthy equity market. The real catalyst is what the health is made of. The ICE BofA US High Yield Option-Adjusted Spread stands at 2.70 percent, a level at which credit investors are accepting almost nothing for default and downgrade risk. That is not a judgment that risk is absent. It is a judgment that someone else will be holding it when it arrives.[1]
Over a four-decade history, high yield has averaged multiples of the current spread. The 2019-to-present average alone is 3.12 percent, and that window excludes the 2008 spike entirely.[1] At 2.70, an investor in the lowest-quality corporate debt is collecting roughly 270 basis points over Treasuries for instruments that can lose half their value in a default wave. Compensation that thin is not a forecast of tranquility. It is a statement about crowding: too much capital is allocated to the trade relative to the risk being borne, and the price of that risk has been competed toward zero.
