LIVE MARKETS-How wide can high yield spreads go?

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HOW WIDE CAN HIGH YIELD SPREADS GO?

March's concerns over U.S. economic growth and the impact of tariff policy have widened high yield bond spreads - at least, by recent standards.

The ICE BofA High Yield Bond Index option adjusted spread .MERH0A0 currently stands at 319 basis points. It's tightened somewhat from the 340 bps touched earlier this month, but is still around its widest levels in six months.

This widening comes after spreads tightened to 259 bps earlier this year, their narrowest since 2007.

Capital Economics senior markets economist James Reilly thinks it's unlikely spreads will touch those levels again this year, despite expecting U.S. economic growth to rebound next quarter and some recession worries to ease.

"Spreads already look too low given recent GDP growth ... we also don’t expect fading recession fears to drive much spread compression," Reilly says.

Reilly also expects junk bond spreads to widen significantly in 2026, given his expectations for the economy to slow and the U.S. stock market to fall into a bear market next year, which would spark a significant selloff in risk assets.

Despite that, with spreads already at multi-year lows, Reilly thinks high yield bonds could struggle to outperform, and could even underperform Treasuries over the next few years as investors take risk off the table.

"Our forecasts imply that US HY will outperform US investment grade (IG) credit and Treasuries in 2025 but underperform in 2026...we project similar returns from all three between now and end-2026."

(Lisa Mattackal)

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