Spreads are tight – the three words you will invariably hear when you discuss fixed income with any fund manager or industry professional at the moment. In fairness, it is completely true. Take high yield, for example, where spreads are in the tightest 5% of readings over the past 25 years*. Logic says they are likely to widen from here, but when is a different question – and one that perhaps many are overlooking.
Figures from the Investment Association’s sterling high yield bond sector show the average fund has returned north of 7% in the past 12 months – yes, global equities are higher (the MSCI World index has returned 14%), but without the same degree of volatility**. The kicker for high yield is the income, where investors can expect high single-digit returns at the moment.
That return from high yield - in a market where we can expect greater volatility and therefore dispersion - is nothing to be sniffed at. The question is whether this is sustainable and I’d argue there are plenty of reasons to suggest that it is.
The reality is that spreads can stay at these tight levels for prolonged periods, particularly if there is economic stability. History shows current levels to be tight, but this is distorted by periods such as the global financial crisis and Covid, where spreads widened to over 2,000 and 1,000 basis points respectively for US and European high yield bonds*.
Firstly, I’d point to the outlook for the global economy being relatively stable. Recent updates from the OECD indicate that global growth proved more resilient than expected in the first half of 2025, especially in many emerging markets but also in the United States***. Figures from the International Monetary Fund point to a slowdown in the global economy from 3.2% in 2025 to 3.1% in 2026, citing trade tensions and policy uncertainty, among other risks****. In a nutshell, the global economy looks relatively benign, which potentially supports this environment for tighter spreads.
Rate cuts are also a boon for the high yield market as they tend to have shorter maturities. Janus Henderson portfolio manager Brent Olson says in this environment fixed yields become relatively more valuable and floating rate assets less attractive. He says: “Spreads may be tight, but if corporate conditions remain robust and interest rates on cash and yields on shorter-dated government bonds are falling, then it becomes easier to reconcile why the market is chasing the higher yield from high yield bonds and is prepared to accept greater credit risk. An extra 2.5%-3% of yield (provided you can avoid defaults) above government bonds has its attractions.”
Defaults are obviously the concern, but figures actually show they have been on the decline. Annual US high yield default rates have averaged 2.5% pa since 2008, but since the pandemic they have averaged less than 1% a year (0.68% in 2025 so far)^. There are other fundamentals which support the stability of the market – not only is the market higher quality (at the end of June 2007, only 41% of the index was rated BB — the highest sub investment grade rating — today, that figure is around 60%, while CCC has halved from 15.7 to 7.9%); but the global high yield bond market is also six times larger than it was 25 years ago. It is also a more global market, with US issuers now accounting for 60% (compared to 80% in 2000)^^.
I’d also argue that trade uncertainty has resulted in many high yield companies bolstering corporate balance sheets. High-yield issuers have chosen to focus on boosting working capital and keeping debt levels manageable as they wait to see how the tariff and trade picture settles. This perhaps reflects the low levels of new issuance.
A research update from Alliance Bernstein says new issuance has largely involved rolling over debt and refinancing, benign corporate actions that have kept spreads sticky and the high-yield universe relatively clean^^^. “Even in the event of an external shock, they wouldn’t expect the high-yield markets to buckle, because market excesses have largely been wrung from the system”, it adds.
There are risks around further geopolitical volatility, as well as the potential for a recession, but perhaps the biggest concern is whether the global high yield market can withstand the pain of a falling dollar. Artemis Global High Yield Bond co-manager Jack Holmes says unlike the corporate and government bond markets, the high yield market has tightened in recent years and does not have excess bonds (therefore there is no need for a marginal buyer). Secondly, while the high-yield market has been contracting, large institutional investors have been increasing their allocations. He says the market is now led by pension funds and insurers, who take a more buy-and-hold approach to the asset class^^^^.
Jupiter Monthly Income Bond manager Hilary Blandy says spreads on high yield remain pretty tight – but feels that on a granular level (for example looking at Euro B/BB grade) there is still some value. She says: “We don’t have our foot on the gas in terms of capturing more upside in terms of spreads, but I don’t think they are crazy tight. What I want to own in high yield is high-conviction credit and as much as I can in short-dated carry trades. Where I haven’t been able to find that kind of paper I’ve been looking at more defensive BB than I usually would.”
High yield is the realm of the active manager in my eyes and I believe we are now in an environment where this is particularly true. There remain plenty of opportunities at sector and company level, with attractive returns and yields on offer. Investors may want to consider the likes of the Aegon High Yield Bond fund, a style-agnostic portfolio which aims to generate long-term outperformance by exploiting global high yield market inefficiencies which range across issuers, sectors and geographies. Those preferring a closed-ended option might look to the Invesco Bond Income Plus investment trust. Manager Rhys Davies can invest across the fixed income spectrum, but tends to focus specifically on the high yield market in Europe and the UK.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre. The views expressed above should not be taken as investment advice.
*Source: Janus Henderson, 3 October 2025
**Source: FE Analytics, total returns in pounds sterling, 21 October 2024 to 21 October 2025
***Source: OECD Economic Outlook, September 2025
****Source: IMF, World Economic Outlook, October 2025
^Source: Insight Investment, 17 September 2025
^^Source: T. Rowe Price, August 2025
^^^Source: Alliance Bernstein, 15 August 2025
^^^^Source: Artemis, 11 June 2025