Macro ·
Junk-bond spreads have compressed to levels last seen before the 2007–09 financial crisis, with historical precedent suggesting investors should consider hedging credit exposure before volatility returns.
US high-yield (junk bond) spreads have tightened to approximately 270–290 basis points over Treasuries, levels last observed in mid-2007 before the credit crisis erupted. The ICE BofA HY Index OAS has compressed ~120bps from its April 2025 peak above 400bps, driven by resilient corporate earnings, declining default expectations, and strong institutional demand for yield. The 2007 parallel is apt: spreads at similar levels preceded a 1,600bps widening over 18 months. Current context differs—bank balance sheets are stronger, CLO structures more robust—but the risk/reward on new HY exposure is asymmetric: ~290bps of carry versus potentially catastrophic spread widening if macro deteriorates. HYG and JNK ETFs are the most liquid short vehicles. Investment-grade spreads (~90bps) are similarly compressed. Rising stars (BB→BBB) have dominated upgrades, flattering the index. Watch August's default rate data from Moody's and S&P; any uptick in CCC-rated stress will be the earliest warning signal. Leveraged loan spreads, now near 450bps, provide a secondary cross-check.