CCC bonds have made the case for discipline

CCC bonds offer selective value because wide dispersion in credit quality makes disciplined security selection more important than broad exposure.

• CCC bonds returned -3.4% in Q3 2026, compared with -1.82% for the overall high-yield market.
• The ICE BofAML US High Yield Index spread to worst widened from 294 basis points at the start of Q3 to 327 basis points as inflation concerns and potential rate hikes increased.
• Securities with option-adjusted spreads above 500 basis points form a fat tail that pulls the benchmark average higher and often reflects elevated default risk.
• The median high-yield market spread was 199 basis points, which Federated Hermes considers a better gauge of valuation opportunities than the average spread.
• Within and across rating buckets, spreads vary considerably, while some CCC companies still show growing revenue, earnings and free cash flow despite fully levered balance sheets.

Takeaway: Investors should focus on issuers whose operating businesses can generate stable free cash flow and service their capital structures, while recognizing that lower-rated bonds carry higher default, liquidity and volatility risks.