HY Credit Spread (OAS)

What Are HY Spreads?

High yield spreads measure the extra yield investors require to hold bonds rated below investment grade (BB+ and lower by S&P, Ba1 and lower by Moody's) compared to US Treasury bonds of similar maturity. The benchmark is typically the ICE BofA US High Yield Index option-adjusted spread (OAS), quoted in basis points.

Why Spreads Move

Spreads compress (tighten) when: - The economy is growing and default risk is low - Investors are hungry for yield and comfortable taking credit risk - Liquidity conditions are easy

Spreads widen when: - Recession fears rise and default expectations increase - Liquidity dries up and investors demand more compensation for illiquidity - Risk appetite collapses (flight to quality)

Historical Context

- **Pre-GFC normal**: ~300–400 bps - **GFC peak (2008)**: ~2,000 bps - **COVID peak (March 2020)**: ~1,100 bps - **Post-COVID tight (2021)**: ~300 bps - **2022 hiking cycle peak**: ~600 bps

HY Spreads as a Leading Indicator

Credit markets often lead equity markets. A sustained widening in HY spreads — especially if accompanied by rising CDS indices like CDX HY — is a warning sign that credit conditions are deteriorating, typically foreshadowing equity stress or economic slowdown.

The Spread-Treasury Decomposition

Total HY yield = US Treasury yield + credit spread. Rising HY spreads can occur even when Treasury yields fall (risk-off), or spreads can be stable while total yields rise because Treasuries are selling off. Isolating the spread component gives a cleaner read on credit-specific stress.

What to Watch

- ICE BofA US High Yield OAS (Bloomberg: H0A0 OAS) - CDX HY Index (CDS-based, more liquid and real-time) - Dispersion across sectors — energy HY vs consumer HY can diverge significantly