Business
HY Credit Tighter Now Than Before the March Shock
US high-yield spreads compressed to 279 basis points in May after a 56-point tariff-and-Iran shock was reversed and undercut in three weeks. The OAS is 38 points above the June 2007 pre-crisis floor, while Moody's pessimistic default scenario for October 2026 sits at 8.3%.
US high-yield spreads sit at 279 basis points, 38 points above the June 2007 all-time low, set the same month Bear Stearns hedge funds began failing.
The ICE BofA HY OAS began March at roughly 305 basis points. US strikes on Iranian energy infrastructure beginning February 28 blocked Strait of Hormuz tanker traffic; Brent crude rose roughly 55% by late March. USTR's Section 301 investigations into industrial overcapacity, opened March 11 against China and fifteen others, compounded the oil shock and drove spreads to 361 basis points over eight trading days.
By April 21, spreads had retraced to 285 basis points, below where March had opened. The Hormuz disruption was still in place. The speculative-grade default rate, per Moody's, held at the same 3.2% it had been when the widening started.
The June 2007 all-time low was 241 basis points. The December 2008 reading was 2,182 basis points. Bear Stearns liquidated its two mortgage hedge funds in July 2007, one month after the trough.
The 24-month picture is compression. Janus Henderson placed the HY OAS at 280 basis points in September 2025, already in the tightest 5% of readings over 25 years. May's 279 basis points is one basis point through that floor.
J.P. Morgan Asset Management's realistic-surprise scenario for 2026 has spreads reaching a new all-time low below 241 basis points, citing extended maturity walls and private credit absorbing lower-quality borrowers from the public market.
Moody's baseline GDP growth of roughly 1.5% sits at the growth rate its own research marks as stall speed. Below that threshold, speculative-grade defaults historically accelerate.
The scenario fan for October 2026 runs from 1.7% to 3.8% to 8.3%. At 279 basis points, the market is priced at the optimistic pole of that fan.
The V-shaped retrace exposes a structural limit: OAS tracks defaults already booked. Borrowers now entering stress sit in ratings reviews and covenant negotiations, not yet in the denominator. The 2007 trough came while growth data looked resilient; defaults followed twelve months later.
The Moody's pessimistic scenario places defaults at 8.3% by October 2026, against a 3.8% baseline. If defaults track that path, a spread of 279 bps in May 2026 becomes the June 2007 data point.