Market volatility tied to trade uncertainty has driven substantial spread-widening in a short period of time, creating what we believe are attractive income opportunities in the high yield market.
High yield spreads have widened roughly 200 basis points (bps) over the past two months and are approaching the 450bps range,1 a radical departure from the recent tights of 262bps in mid-February. Spreads are now within a range where, based on our research, forward returns have historically been compelling for investors. Within the high yield universe, BB-rated credit spreads have widened to north of around 290bps from 2025 year-to-date tights of +155bps. At first look, these spreads may not appear interesting when compared to those experienced in high yield over the past 20 – 30 years during volatile episodes or recessionary periods, but we think the fundamentals beneath the surface warrant examination.
Up in Quality
High yield has matured over the past 10 – 15 years into a market with a larger proportion of BB-rated bonds (+1,500bps since 2007), increased secured debt issuance (+3,700bps since 2007), lower duration (roughly 1.4 years lower since 2007) and far more conservative use of proceeds. Acquisition financing has declined roughly 3,800bps since 2007 and lower-rated securities now account for less than 10% of total new issuance; this is compared to the 36% seen in 2007 during the run-up to the Global Financial Crisis. Each of these factors in isolation represents a reduction in credit and default loss risk for the market, and collectively, just a few weeks ago, they were driving high yield spreads to near all-time tights.
High Yield: An Improving Quality Profile
U.S. High Yield Index Characteristics Over Time
| 2007 | 2015 | 2024 | Change Since 2017 | |
|---|---|---|---|---|
| Ratings Mix as % of Overall Market | ||||
| BB | 38.2% | 45.4% | 53.4% | 15.2% |
| B | 43.2% | 38.7% | 34.5% | -8.7% |
| CCC | 18.8% | 12.9% | 12.1% | -6.7% |
| Duration | 4.63 | 4.23 | 3.22 | -1.41 |
| New Issue Use of Proceeds Breakdown | ||||
| Refinancing | 35.0% | 43.4% | 76.8% | 41.8% |
| Acquisition Finance | 51.5% | 37.5% | 12.9% | -38.6% |
| Upper (Split BBB, BB) | 22.5% | 42.3% | 43.0% | 20.5% |
| Middle (Split BB, B) | 41.3% | 45.1% | 49.6% | 8.4% |
| Lower-rated (Split B, CCC, NR) | 36.3% | 12.6% | 7.4% | -28.9% |
| Senior Secured Issuance | 7.2% | 22.7% | 44.4% | 37.3% |
Source: J.P. Morgan.
Now, after roughly 200bps of widening, we believe these quality factors, combined with spreads in the +450bps range and yields of around 8.5%, create a potential case to add to high yield exposure. Building a high yield allocation can take time, and this could be an occasion to move halfway toward a full allocation, with room to add further if additional widening occurs. Given the gradual quality improvement of the market, we think +600bps represents a reasonable estimate of where high yield securities could move in a more challenging economic environment.
Keep in mind that, with the exception of short-term liquidity-driven episodes, the high yield market has rarely traded wide of 600bps over the past decade, consistent with its upward shift in quality. During trade conflicts with China in 2018 – 2019, high yield spreads never reached 600bps, instead peaking briefly at around 550bps before settling into the 400 – 450bps range. During the worst of the COVID crisis, high yield traded wide of 600bps for about four months. Finally, in mid-2022 at the beginning of the Russia-Ukraine conflict, spreads stayed wide of 600bps for less than a week before bouncing between 400bps and 550bps for the subsequent year.
Given the high yield market’s recent history and improved credit profile, we think it is worth reassessing previous spread-scenario analyses and considering the potential merits of high yield in the current climate.
