Outlook
Further growth in the supply of high yield bonds may be on the way. After several subdued years, corporate M&A activity has shown renewed signs of life. Large-scale LBO activity, which had also been dormant, has picked up as well. Video game maker Electronic Arts recently announced plans to go private in what would be the largest LBO in history. The $55 billion enterprise value includes $20 billion of debt, which is expected to be financed in the leveraged loan and high yield markets.
High yield supply may also come from an unexpected source: AI infrastructure. Earlier this year, AI computing power provider and first-time high yield issuer CoreWeave1 sold $3.75 billion of high yield holding company bonds to help finance its purchase of computer power from Nvidia. Cryptocurrency miner and another debut issuer, TeraWulf, announced plans to raise $3.2 billion of high yield bonds to finance part of a data center expansion.
In recent years, bullish investor sentiment toward credit has led to a sharp compression in the liquidity premium—the extra yield on top of the premium for credit risk that investors demand to hold smaller, private, or less transparent companies. Historically, investors required meaningful additional yield to compensate for this risk. Today, many are rushing into private credit, willing to sacrifice liquidity for the prospect of modestly higher returns. Tricolor2 and First Brands3 serve as cautionary reminders that this premium should probably be higher.
Overall, we observe that high yield credit fundamentals remain strong. High yield issuers are mostly exposed to the U.S. economy, which has avoided a recession. As shown below, the leverage ratio for high yield companies has declined below the historical average and the interest coverage ratio remains higher than past levels.
Valuations fully reflect the combination of favorable supply/demand, strong credit fundamentals, and bullish investor sentiment. As of November 30, 2025. the ICE BofA U.S. High Yield Index spread-to-worst of 307 bps is lower than its historical median and the post-GFC "non-panic" range of 325-525 bps, as illustrated below:
While tighter-than-average high yield spreads are consistent with the current “everything rally” environment, in our view overall yields in U. High Yield remain attractive. Current yields of 6.7% compare favorably to the post-2009 average yield of approximately 6.5% on the ICE BofA U.S. High Yield Index, especially when factoring in the improved credit quality of the market over that period.
3. https://www.bloomberg.com/news/articles/2025-09-29/auto-parts-supplier-first-brands-files-for-bankruptcy
Definitions:
Leverage Ratio is a measurement used to determine the relationship between a company's debt and assets. It can be used to measure the amount of capital in the form of debt and loans, or to assess a company's ability to meet its financial obligations.
Interest coverage ratio is a debt and profitability ratio. It shows how easily a company can pay interest on its outstanding debt. The ratio divides a company’s earnings before interest and taxes (EBIT) by its interest expense over a specific period.
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