View from the markets: Is high-yield credit flashing a warning sign?

High-yield spread widening is driven more by interest-rate volatility and market technicals than by a material deterioration in US economic fundamentals.

• US high-yield option-adjusted spreads rose from 267 basis points on 8 September to 318 basis points on 1 October, approaching the late-March peak.
• The recent move diverged from oil prices: spreads initially followed the July oil rally but later rose even as oil prices fell, while strong US data increased expectations of further Federal Reserve rate hikes and France’s elections and fiscal position lifted global bond yields.
• September was the fifth busiest month ever for high-yield gross and net issuance, while two weeks recorded net outflows as higher rate volatility discouraged buyers.
• Spread widening was concentrated in lower-rated CCC bonds, pulling higher-quality names along; the team sees opportunities in BBB-rated bonds if rate volatility declines.
• September private payroll growth was only 46,000, but the adult unemployment rate remained 3.8% and year-on-year growth in non-seasonally adjusted employment improved slightly to 0.5%; youth unemployment rose from 7.1% to 8.0% amid possible AI-related labour-market effects.

Takeaway: The authors’ fixed-income team remains overweight US high yield because growth and corporate profits support fundamentals, but investors should remain vigilant about the pressure that higher official rates could place on vulnerable sectors.