The ICE BofA US High Yield Index gained 1.86% in June, which represented its strongest monthly return since July 2024. For the second quarter, the Index rose 3.57%, bringing first half 2025 returns to 4.55%.
Intra-year volatility in spreads has been remarkable. After bottoming at a 20-year low of 279bps in mid-February, the high market’s spread spiked to 476bps in early April following the tariff announcements, only to then retrace its way back to 321bps (Source: JP Morgan).
Entering 2025, demand for high yield and all leveraged credit was already robust. After the volatility in March and April, the calmer market environment since May — driven by easing tariff concerns, growing expectations of Fed rate cuts, and a surging stock market, with the S&P 500 up 25% from its low — has further boosted investor demand for high yield.
According to JP Morgan, retail investors pulled $10.9 billion from high yield mutual funds and ETFs in April following the initial tariff announcements. They have already recouped nearly all of these outflows, posting $6.6 billion and $6.5 billion inflows in May and June, respectively. Year-to-date, high yield funds have seen inflows of $9.5 billion.
The real demand, though, has come from institutional investors. After market volatility in March prompted multi-strategy hedge funds to reduce their high yield exposure, the sharp spike in spreads following the April tariff announcement was met almost immediately by many large investors increasing their high yield allocations.
The bulk electronic trading of pools of bonds, or “portfolio trading”, has facilitated the process of investing in high yield quickly and relatively efficiently, and has gained in popularity. According to Barclays, portfolio trades grew 90% in Q1 2025 compared to the same period in 2024. $43 billion of portfolio trades happened in April, compared to just $15 billion in April 2024.
There are not enough high yield bonds to meet this demand. Even though June represented the most active month of issuance so far in 2025, Year-to-date new issuance of $146 billion is 10% below 2024’s pace. In addition, the net impact on the high yield market has been modest, as more than 72% of the proceeds so far in 2025 were used to simply refinance existing bonds.
The supply of new high yield bonds continues to be hampered by a sluggish corporate M&A environment and a lull in private equity sponsored LBO activity. Strong demand for leveraged loans, and to a lesser extent, the rapid growth in private credit have also played roles. Both markets vie to lend to companies that might otherwise issue high yield bonds.
Credit fundamentals remain strong. High yield issuers are mostly exposed to the US economy, which has avoided a recession. The leverage ratio for high yield companies has declined below the historical average and the interest coverage ratio remains higher than past levels. secured debt. In our view, high-yield credit trends remain advantageous with more upgrades than downgrades and low leverage ratios compared to historical averages.
Given favorable credit fundamentals, a spike in defaults in the foreseeable future would be surprising absent a severe recession. Defaults remain low by historical standards—currently 1.5% compared to a 25-year average of 3.4%—and are expected to stay in the 2–3% range over the next several years (Source: JP Morgan).
Optimism around credit has led to a sharp decline in the liquidity premium investors typically demand in addition to compensation for default risk. Historically, investors required significantly higher yields to hold illiquid credits. Today, those same investors are rushing into private credit, readily sacrificing liquidity for the prospect of only modestly higher returns.
Valuations fully reflect the combination of favorable supply/demand, strong credit fundamentals, and bullish investor sentiment. As of June 30, 2025. The ICE BofA US High Yield Index spread-to-worst of 321 basis points is lower than its historical median and the post-GFC "non-panic" range of 325-525 basis points, as illustrated below:
Figure 1: Spread to Worst
Index: ICE BofA US High Yield Index
As of June 30, 2025
Source: ICE Data.
While tighter-than-average high yield spreads are consistent with the current “everything rally” environment, overall yields in U.S. High Yield remain attractive. Current yields of 7.2% 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.
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ICE BOFA US HIGH YIELD INDEX
The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The ICE BofA US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch) and an investment grade rated country of risk (based on an average of Moody’s, S&P and Fitch foreign currency long term sovereign debt ratings). In addition, qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $100 million. Original issue zero coupon bonds, "global" securities (debt issued simultaneously in the Eurobond and U. S. domestic bond markets), 144a securities and pay-in-kind securities, including toggle notes, qualify for inclusion in the Index. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security. DRD-eligible and defaulted securities are excluded from the Index.
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