In the world of fixed income investing, few indicators attract as much attention as the high yield spread. For seasoned investors and analysts, this measure offers deep insight into the credit markets, risk appetite, and overall health of the global economy.
The high yield spread—also known as the high yield bond spread or credit spread—tracks the difference in yields between high yield bonds (often called junk bonds) and government bonds of similar maturity. It’s a crucial barometer for understanding market sentiment, default risk, and the expected returns investors demand for taking on higher risk.
In this article, we’ll explain what the high yield spread is, why it moves, and how it affects bond prices, using examples from the ICE BofA US High Yield Index and broader credit markets.
The high yield spread represents the additional yield that high yield bonds must offer above government bonds to attract investors.
For example, if a 10-year U.S. Treasury bond yields 4% and a high yield bond of similar maturity yields 8%, the high yield bond spread is 4 percentage points, or 400 basis points.
This spread compensates investors for taking on credit risk—the default risk that the issuer may fail to make interest or principal payments. Because of this greater risk, high yield bonds must offer a higher interest rate than government bonds to entice investors.
In general:
Narrow high yield spreads suggest confidence in the economy and corporate earnings.
Wide spreads signal fear, rising default risk, and possibly an upcoming slowdown or recession.
The high yield market includes corporate bonds issued by companies with lower credit ratings, typically below BBB- by S&P or Baa3 by Moody’s. These are considered non-investment grade or junk bonds, and are grouped by their given rating category, such as rated BB and below.
While the term “junk” sounds negative, many of these securities are issued by stable companies with higher leverage or smaller size, not necessarily distressed firms. High yield bonds can offer attractive yields, but also come with higher default risk and greater price volatility.
In the US domestic market, most high yield bonds are US dollar-denominated, issued by large cap or mid-sized companies across industries such as energy, telecommunications, and consumer services.
One of the most widely followed benchmarks is the ICE BofA US High Yield Index (formerly BofA Merrill Lynch US High Yield Index), which tracks the performance of US dollar-denominated, below-investment-grade corporate bonds issued in the US domestic market and their option-adjusted spreads (OAS).
The option-adjusted spread, or OAS, refines the basic high yield spread by accounting for embedded options—such as the right of the issuer to call (redeem) a bond early.
Since callable bonds have different risk profiles, the OAS index adjusts for this, allowing investors to compare bonds more accurately across the credit spectrum.
The ICE BofA US High Yield OAS Index measures the average spread of high yield bonds over a spot Treasury curve, adjusting for embedded options. The index is constructed by aggregating each constituent bond's OAS, weighted by market capitalization, so that the overall index reflects the combined risk premium of all bonds in the index.
When the OAS widens, it typically means investors are demanding higher compensation for credit risk. When it narrows, investors are more comfortable with risk, often reflecting optimism in the global economy.
The high yield bond spread is computed by taking the average yield of a high yield index, such as the ICE BofA US High Yield Index, and subtracting the yield of government bonds (like U.S. Treasuries) with similar maturities.
In mathematical form:
High Yield Spread=Yield on High Yield Index−Yield on Government Bond
Calculated spreads for indices like the ICE BofA US High Yield Index are typically based on weighted averages of the constituent bonds, where the weights are determined by each bond's market capitalization.
For instance, if the ICE BofA US High Yield Index yields 8.3% and the 10-year government bond yields 4.1%, the calculated spread is 4.2%, or 420 basis points.
This spread changes daily as bond prices, yields, and market sentiment evolve. Data for these spreads are published regularly by financial services providers such as ICE, Bloomberg, and the Federal Reserve Bank.
Over time, high yield spreads have fluctuated widely depending on economic conditions. A chart of high yield spreads over the past decade shows how spreads have moved in response to economic events, with spreads often expressed in percent or basis points.
During stable periods, such as 2017–2019, spreads hovered around 350–400 basis points.
In times of crisis—like 2008 or 2020—spreads surged above 1,000 basis points as investors fled from higher risk assets to government bonds.
As of recent data, the BofA US High Yield Index shows spreads near 400–500 basis points (or about 4 to 5 percent), suggesting moderate market caution.
These data ranges help investors gauge whether high yield bonds are relatively cheap or expensive compared to government bonds.
The high yield spread directly influences bond prices. When spreads widen, bond prices fall; when spreads tighten, bond prices rise.
This happens because the yield on a bond moves inversely to its price. A higher required yield (due to a wider spread) means the price of existing bonds must drop so that their effective yield aligns with the new market level.
In essence:
Wider spreads → Lower bond prices
Narrower spreads → Higher bond prices
For example, suppose a high yield bond with a coupon of 7% trades at par when the spread is 400 basis points. If the spread widens to 600 basis points, the bond’s price may fall to 90 or even 85 cents on the dollar to compensate investors for the higher perceived default risk.
The movement in high yield bond spreads reflects a mix of economic, corporate, and market factors:
When the global economy weakens or recession fears rise, investors demand higher yields for junk bonds, causing spreads to widen. Conversely, when the economy is expanding, spreads narrow as credit risk declines.
Strong earnings, low leverage, and improving credit quality drive spreads tighter. Deteriorating balance sheets or declining profitability lead to wider spreads.
While high yield spreads are primarily about credit risk, interest rates still matter. If interest rates rise sharply due to inflation or Federal Reserve Bank policy, bond prices fall, often widening spreads further.
Periods of risk aversion—triggered by geopolitical events, defaults, or liquidity stress—lead investors to sell high yield bonds and move into government bonds, widening spreads. When confidence returns, spreads tighten as buyers step back into the high yield market.
The high yield bond spread varies significantly by rating category. Bonds are subject to specific rating criteria to be classified in each rating category:
| Rating Category | Example | Typical Spread (bps) | Risk Profile |
|---|---|---|---|
| BB rated bonds | Near-investment grade | 200–400 | Moderate risk |
| B rated bonds | Average junk bond | 400–700 | Higher risk |
| CCC and below | Distressed credits | 800+ | Very high risk |
BB rated bonds offer higher yields than investment grade but carry moderate default risk. CCC issues, in contrast, can experience large price swings and are more sensitive to credit events.
At the heart of high yield spreads is default risk—the probability that a company will fail to make payments.
When default risk rises, spreads widen as investors demand higher compensation. Conversely, during periods of economic stability, default rates fall, and spreads tighten.
Historically, default risk in the high yield bond space averages around 3–4% per year, but can spike above 10% in crises. Credit rating agencies like Moody’s and S&P monitor these trends closely, adjusting ratings and outlooks that feed back into spread levels.
However, there is no guarantee that current spread levels or default rates will persist, as market conditions can change unexpectedly.
Because high yield spreads reflect perceptions of risk, they’re often seen as a leading indicator for the economy.
A sudden widening in spreads often precedes slowdowns, as investors anticipate weaker corporate earnings and rising defaults. Tight spreads, on the other hand, indicate optimism and easier credit conditions.
For instance:
In 2008, the ICE BofA US High Yield OAS Index spiked above 1,800 basis points, foreshadowing the deep recession.
In 2020, during the pandemic shock, it jumped from 350 to over 1,000 basis points, then tightened quickly as stimulus stabilized markets.
Thus, tracking the computed OAS index helps investors spot turning points in both credit markets and the global economy.
Monitoring high yield bond spreads is vital for investing effectively in fixed income.
Widening spreads may signal opportunities to buy bonds at discounted prices—but with higher risk.
Tight spreads might suggest caution, as bonds offer less compensation for credit risk.
Professional investors use the high yield spread to balance risk and return across portfolios. Portfolio managers often compare current spreads with long-term averages to decide whether high yield bonds are attractively priced.
However, this requires timely data, context, and careful interpretation—particularly since spreads can shift rapidly based on market news and interest rate changes.
The information provided here is for informational purposes only and does not constitute investment advice.
Government bonds are considered virtually risk-free, backed by sovereign credit. The difference between their yields and those of high yield bonds forms the spread that compensates investors for credit risk, liquidity risk, and market uncertainty.
When the spread between high yield and government bonds narrows, it signals investor confidence. When it widens sharply, it reflects a flight to safety—capital moving out of corporate debt and into government securities.
This difference in yields is central to understanding the pricing mechanism of all bonds in the credit markets.
Let’s look at an example using ICE BofA data:
Date: September 2025
ICE BofA US High Yield Index Yield: 7.9%
10-Year US Government Bond Yield: 4.2%
Calculated Spread: 3.7% or 370 basis points
In the ICE BofA US High Yield Index, cash from bond payments is held in the index until the end of the month and then removed during rebalancing; this cash does not generate reinvestment income while held.
This level suggests moderate risk appetite—higher than the prior year (when spreads were 300 bps), but well below crisis levels.
Such data helps investors assess whether high yield bonds currently offer sufficient compensation for default risk relative to government bonds.
The high yield spread remains one of the most informative measures of market risk and investor sentiment. It influences bond prices, signals changes in the economy, and helps investors decide whether they are being adequately compensated for credit risk.
However, making sense of spreads across thousands of bonds can be challenging. That’s why Bondfish focuses on giving investors clear access to bond data, credit profiles, and yield information in one place. By simplifying access to information that professionals use to interpret the high yield market, Bondfish empowers investors to stay informed and make decisions with more confidence.
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