At today’s levels, we think high-yield credit offers little value to investors. The yield of the Bloomberg U.S. Corporate High Yield Index sits at just 2.6% above Treasuries of similar duration, within spitting distance of the all-time narrow level of 2.3%. The last time spreads were this tight was May 2007 during one of the biggest risk chases in credit history.
And spread tells a story. It can be viewed as the maximum excess return an investor can expect over Treasuries for a period roughly equal to the index’s duration. For high yield, that duration is now just under 3 years, down from the 4–5 year range it carried for most of the past two decades. In other words, even in a best-case scenario, investors can expect no more than about 2.6% return per year above Treasuries over the next few years, and history shows that high yields often earn less as defaults chip away at those returns.
If you look back, the history is consistent. When spreads start this tight, forward returns are poor. Comparing starting spreads vs. forward 4.5-year excess returns makes the point clearly; tight spreads tend to precede weaker outcomes. In the early 2000s and during the financial crisis, spreads were narrow, and realized returns were 10%+ below those levels.
The data gets even more straightforward when grouped by spread levels:
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- When starting, OAS was below 3%, and the average forward excess return to Treasuries was negative.
- When spreads were 3–6%, forward excess returns averaged ~1.6%.
- 6–9% starting spreads produced ~5.3% average excess returns.
- Above 9%, excess returns jumped to 13%+.
That’s the playbook. You want to own high yield after spreads widen, not before.
We’re not predicting a blowout in credit markets; we just think the return-to-risk tradeoff is terrible at today’s levels. There’s almost no upside left and plenty of ways to lose. Tight spreads don’t just mean low potential returns…they mean no margin for error.
Consider Alternative Solutions
If you’re looking for income, move up in quality or stay flexible until spreads reset. Historically, the best opportunities in high yield have come when fear is high, not when risk appetite is.
When spreads are this tight, credit is offering returns without resilience. Rather than stretching for yield that offers little compensation for risk, investors can look to alternative strategies that pair growth potential with defined downside management. We’ve written on ways to improve on a 60/40 before; current conditions probably warrant a fresh read.
Disclosures
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
*Conceptual Illustration: Information presented in the above charts are for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. As these are not actual results and completely assumed, they should not be relied upon for investment decisions. Actual results of individual investors will differ due to many factors, including individual investments and fees, client restrictions, and the timing of investments and cash flows.
Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2510-30.
