US High Yield Market Shows Resilience Amid Global Crises
The US high yield market has displayed a resilience that bears a striking resemblance to the internet meme of the honey badger, a creature known for ignoring danger. These animals, members of the Mustelidae family, live in Africa, the Middle East, and India. They appear cute but are actually dangerous, smart, and incredibly tough. The meme showed the animal falling asleep after a cobra bite only to wake up and eat the snake, or fighting off lions and wild dogs without hesitation. The narrator’s repeated line, “Honey badger don’t care,” became a symbol of invincibility.
A History of Resilience
When looking at a chart of US High Yield spreads over the past dozen years, the analogy holds up. The market has weathered significant shocks without collapsing. Oil bubbles bursting, tightening Federal Reserve policy, and global pandemics have all caused spreads to widen. However, the market has generally recovered quickly in most cases.
The recession widely expected in 2022 never materialized on the scale investors feared. Corporate earnings held up better than anticipated, and defaults remained contained. Each event initially viewed as the start of a broad credit downturn eventually turned out to be less severe than expected. This pattern repeats across the chart, suggesting a market that absorbs shocks rather than succumbing to them.
A key factor in this durability is the change in the composition of the high yield index. Bonds rated BB accounted for approximately 38% of the index in 2007. By 2026, that share had risen to about 60%. The average duration of these bonds has also fallen, while secured issuance has increased. Refinancing has largely replaced acquisition financing as the dominant use of proceeds in the new issue market. This shift toward higher quality issuers and shorter duration creates a structural buffer against volatility.
This evolution is not just about the bonds themselves. The broader financing ecosystem has shifted, with leveraged loans and private credit capturing market share that once belonged to the high yield market. Some market participants expressed concern years ago that the shrinking size of the high yield market would hurt liquidity. In hindsight, that private credit growth may have actually provided a stabilizing force by funding speculative borrowers outside the public index. Recent stress has been concentrated in certain segments of the US private credit universe, particularly those with a heavy technology skew. However, this has not yet materially altered the overall quality of the high yield index.
The Role of Supply and Demand
Beyond the quality of the bonds themselves, strong technical factors have also played a part in keeping spreads tighter than many expected. New issue supply was suppressed until recently, partly because of the surge in demand for loans and private credit. Simultaneously, demand for yield remains robust, creating an imbalance that has helped contain spreads. Investors rely on yield and carry rather than spread alone. Higher base rates support attractive all-in yields despite relatively tight spreads. This environment helps draw buyers back into the market during periods of volatility, which further limits spread widening.
We are operating in a higher-rate environment, the US 10YR is hovering around 5% and, if this persists, higher borrowing costs could pressure earnings/cash flow and create challenges for some issuers as debt maturities and refinancing needs arise. Will this lead to a broader credit event? Not to sound sanguine, but whatever manages to shock the market next, changes in index composition, supportive technicals, and a shifting financing ecosystem suggest that future volatility spikes will likely be absorbed. These factors may even create attractive buying opportunities.
