Some market participants claim that the era of +1,000 basis point (bps) high yield spreads is over. They cite stronger credit quality, proactive Federal Reserve policies, and limited bond supply as reasons spreads won’t reach past extremes in future recessions.
But a deeper, data-driven analysis suggests otherwise: high yield spreads breaching +1,000 bps in the next recession is not only possible—it’s likely.
History Says It Can Happen Fast
In the 2020 recession, the ICE BofA US High Yield Index spread surged from +360 bps to +1,087 bps in under three months. That spike resulted in a -20.56% total return—far worse than investment-grade bonds or mortgage-backed securities during the same period.
This recent history challenges the belief that today’s improved credit environment makes +1,000-bps spreads obsolete.
Why Experts Say It Won’t Happen—And Why They’re Likely Wrong
Three common arguments suggest +1,000 bps spreads are behind us:
- Improved credit quality in the high yield index
- Fed intervention to cap spread widening (“Fed put”)
- Persistent shortage of high yield supply
Each argument sounds plausible. Yet, all break down under close examination.
1. Better Credit Quality? Not Enough
It’s true the high yield index has a greater share of BB-rated bonds today—53.55% as of April 17, 2025, compared to a long-term average of 44.53%. However, this improvement is only marginal when compared with the 2020 recession, which also had a high BB share.
Using current ratings and spread behavior from the last downturn, projections still point to an OAS of +1,093 bps in a similar recession. That’s higher than the 2020 peak, due to a larger presence of deeply distressed credits (CC and C ratings). So, better quality alone won’t prevent a +1,000-bps spike.
2. Can the Fed Really Cap Spreads?
The Federal Reserve often steps in to support credit markets, especially through rate cuts. But history shows that Fed action does not halt spread widening immediately.
While intervention may reduce the depth of a spread surge, it hasn’t prevented spikes to +1,000 bps or more during recessions. Betting on the “Fed put” is not a guarantee against future volatility.
3. Supply Shortage Doesn’t Mean Price Immunity
Yes, high yield bond supply has stagnated. As of April 2025, the index’s total face amount remains at $1.4 trillion—unchanged from 10 years ago. With more capital chasing fewer bonds, spreads have appeared rich versus fair value.
From late 2022 to early 2025, the actual high yield spread stayed consistently below fair value—sometimes by as much as 200 bps. Yet data reveals that when the actual spread increases, the overvaluation gap shrinks dramatically. In October 2023, a 39-bps spread increase erased 100 bps of overvaluation.
Conclusion: When recession strikes and spreads surge, sellers may flood the market. Buyers won’t step in until spreads normalize—or even overshoot—fair value. Supply shortage won’t stop spreads from climbing.