No. Following President Donald Trump’s announcement about reciprocal tariffs on April 2, credit spreads have widened for US high-yield (HY) bonds and broadly syndicated loans, prompting some investors to ask whether it’s an opportune time to add exposure to these assets. We believe it is too early. Spreads for most assets are merely back to around their historical medians and could move higher from here if economic growth deteriorates. While alternative assets such as collateralized loan obligation (CLO) debt are more attractive in the current environment, this asset class would also not be immune to additional market stress.
Heading into 2025, historically low spreads on some higher-yielding credit instruments meant investors were not well positioned for recent tariff-related turbulence. At the end of 2024, the option-adjusted spread (OAS) on US HY bonds stood at 287 basis points (bps), in the bottom decile of historical observations. As a result, while the backup in spreads in recent weeks felt dramatic, it still leaves the current OAS (409 bps) below its historical median. A similar trend is evident in loans. The discount margin on BB-rated loans has widened by approximately 40 bps in 2025, but the current 297-bp spread is only around the 45th percentile of historical observations.
Investors considering increasing allocations to these assets should recognize spreads could go significantly higher if the economy enters recession. While the Global Financial Crisis may be an extreme level for comparison (HY spreads reached nearly 2,000 bps), during the past three recessions HY spreads averaged around 800 bps, around double today’s level. Another consideration is whether current pricing suggests HY bonds can keep pace with a comparable stock/bond mix. Our data suggest that buying HY bonds around current spreads (in the second quartile) has often resulted in underperformance relative to a stock/bond mix. Conversely, HY bonds have typically outperformed when spreads rise to the top quartile (around 585 bps or higher). Investors may be better off waiting for spreads to reach these higher levels before increasing allocations.
While the macro environment remains uncertain, there are positive arguments to be made in favor of US HY bonds and loans. Entering what may be a period of subdued growth, many HY issuers are in a position of relative strength. Rising revenue and earnings have allowed companies to gradually deleverage in recent years, and metrics like interest coverage ratios have shown steady improvement. Notably, today’s HY index consists of higher-quality borrowers than historically has been the case, which could provide a buffer if conditions worsen. Currently, ~53% of the HY index carries at least one BB rating, an 8 percentage point increase from a decade ago.
HY bonds and loans may also benefit from investors attracted to their higher coupons. The current HY bond index yield of 8.4% is around 170 bps above its average over the past decade. While broadly syndicated loan yields—currently around 9.0%—may also look enticing, we caution that this reflects lower average credit quality. Additionally, these instruments may see coupons decline if, as expected, the Federal Reserve resumes its rate-cutting cycle in 2025.
Given the uncertainty surrounding tariff-related volatility and concerns over foreign demand for US assets, investors should hold off on adding HY and loan exposure. Also, certain pockets within liquid credit already appear more attractive. One example is CLO mezzanine debt, which currently offers a discount margin of around 775 bps (equivalent to around a 11.5% yield). Historically, this asset class has suffered lower defaults than comparably rated HY bonds, though its lower liquidity can result in higher mark-to-market volatility. Due to the dispersion in underlying CLO fundamentals, we believe this asset class is best accessed via skilled managers.
In summary, HY bonds and loans have sold off in recent weeks, but from historically expensive levels. We recommend waiting for further clarity on the macro outlook or further pricing improvements before adding exposure to assets like HY bonds and loans. When conditions improve, investors contemplating adding to credit allocations should also consider CLO debt, which is currently more reasonably priced but may still face spread widening if tariff-related volatility escalates. Meanwhile, investors should maintain allocations to high-quality sovereign bonds, which should continue to provide critical portfolio diversification and stability amid ongoing macro uncertainty
Wade O’Brien, Managing Director, Capital Markets Research