279 Basis Points Priced In a Truce That Expires

The ICE BofA High Yield OAS closed May at 279 basis points, tighter than 94 percent of all daily readings since the index launched in 1996.

The index entered 2025 at 287 basis points, already in the bottom decile. Liberation Day tariff announcements pushed it to roughly 409 bps within days of April 2. By September it had retraced to 280 bps. The May 2026 Trump-Xi summit cut it to 279, below the pre-shock level.

The last two credit-driven episodes at this percentile ended in widening that took years to recover. In June 2007, the OAS reached 241 basis points; by December 2008 it had widened to roughly 2,100 bps. In mid-2014, the index sat near 336 bps; by February 2016 it reached 887 bps, driven by energy-sector defaults. The 2021 episode was different: the July tight of 256 bps widened in 2022, but rate shock rather than credit losses drove most of the move, and spreads recovered within 18 months.

The Percentile Problem

That 94 percent figure holds on a raw basis. The index today carries a different composition than in 2007, when the headline floor was 241 bps. BB-rated bonds now make up 50.1 percent of the index, near a 10-year high; CCC and below has fallen from roughly 23 percent post-crisis to about 12 percent.

Janus Henderson's quality-adjusted calculation places the 2007 floor at 201 bps, restating the older, lower-quality index to today's BB-heavy composition. At 78 bps above that adjusted floor versus 38 bps above the 241 bps raw trough, the compression is real. But it is less extreme than the headline percentile implies.

The Default Divergence

Moody's publishes two default metrics, and they measure different time horizons. The forward probability of default for US HY companies stood at 3.2 percent as of March 2026, roughly 10 to 12 months ahead of the trailing realized rate.

The trailing rate is higher. 16 companies defaulted in Q1 2026, a pace translating to approximately 5 percent on a trailing-12-month basis.

At a standard 60 percent loss-given-default, the break-even default rate at 279 bps is 4.65 percent. Against the 5 percent trailing rate, annual credit losses run to roughly 3.0 percent, above the 2.79 percent spread. If the 3.2 percent forward PD plays out instead, annual credit losses fall to 1.92 percent, leaving 87 bps of excess spread. The 279 bps level prices Moody's optimistic forecast, not the trailing rate.

The November Horizon

The US-China agreement cut the effective tariff rate from 41 to 31 percent, with the core 24 percent reciprocal duty suspended until November 10, 2026. Semiconductor and rare-earth disputes stayed open.

About $160 billion in high-yield bonds mature in 2026. Q1 corporate issuance ran at its highest quarterly pace since Q2 2020. Borrowers front-loaded to lock in the spread window. The paper they printed carries no premium for November 10.

As with the $40 billion in reinsurance cover that followed the Hormuz mining, the instrument narrowed the visible risk premium without resolving the underlying dispute.

Reinstating the 24 percent duty would invalidate Moody's 3.2 percent forward PD before it converts to a realized default rate. The market has already priced the lower number.

For HY fund managers extending duration into H2 2026, the November 10 date exposes a bet the spread does not price. Moody's 3.2 percent forward PD was published in March, two months before the truce placed a calendar on it.

The CCC cohort already prices a different path. The CCC OAS sits at 931 bps, against 279 bps at the headline, a 3.3x ratio. In June 2007, CCC ran at 414 bps against the 241 bps floor, a 1.7x ratio. Watch whether CCC OAS crosses 1,000 bps before September 1.