While the financial media seems mostly focused on the new record highs in U.S. equities, U.S. corporate credit is on a historic run of its own. The ICE BofA U.S. High Yield Index gained 2.4% in Q3, extending its winning streak to 12 consecutive quarters, the longest since 1997. Spreads tightened by 2 bps during the quarter and 11 bps year-to-date, ending September at 299 bps—only 22 bps wider than the post-2008 tights reached earlier in 2025. Investment grade spreads are even narrower on a historical basis: the spread on the ICE BofA U.S. Corporate Index ended the quarter at 76 bps, its tightest level since 1998.
The seemingly insatiable demand for high yield has continued unabated in 2025, except for a brief period of volatility following Liberation Day; in April, retail investors pulled $10.9 billion from U.S. high yield mutual funds and ETFs, according to J.P. Morgan. Since then, from May through September, retail investors poured a total of $18.5 billion back into high yield funds, including $1.7 billion in September alone. Year-to-date, high yield funds have seen inflows of $14.9 billion. When combined with inflows into leveraged loan and investment grade bond funds, total retail demand has swelled to approximately $75 billion year-to-date, according to LSEG Lipper. These figures do not include demand from institutions, which we believe many of whom also increased credit allocations following the post–Liberation Day widening in spreads.
The supply of high yield bonds may finally be starting to catch up with demand. September new issuance totaled $53 billion, marking the third-highest monthly volume in the high yield market’s history and the most active month since 2021. After running about 10% below 2024 levels through Q2, year-to-date high yield issuance ended Q3 up 12% versus 2024.
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 (source, let’s footnote this to bottom of page)). 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 (source). 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 CoreWeave sold $3.75 billion of high yield holding company bonds to help finance its purchase of computer power from Nvidia (source - footnote). On October 14, 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 (source - footnote).
At the same time, some notable cracks have begun to emerge in the leveraged credit markets. In September, auto parts supplier First Brands announced it had run out of cash and filed for bankruptcy, wiping out shocked investors (source). The company’s Term Loan B—rated B1/B+ as recently as September—traded at $96 on September 4 and changed hands at $11 on October 14, according to Bloomberg. (First Brands did not issue high yield bonds but carried $5.5 billion of leveraged loans).
Just weeks earlier, Tricolor, a subprime auto dealer and finance provider, stunned investors when it abruptly filed for Chapter 7 liquidation. According to Bloomberg, the highest-rated tranches of the company’s asset-backed securities (ABS)—once rated AAA—now trade in the $70s, while a lower-rated tranche has plunged from $105 in early September to $12.50. (Tricolor was not a high yield issuer either, but it had issued over $2 billion in the ABS market over the past five years).
The circumstances surrounding First Brands and Tricolor appear to be company-specific and unrelated, but there are similarities. Both were private companies not subject to the same disclosure requirements or scrutiny as public issuers. Both companies obtained financing in opaque and less regulated markets. The lax oversight afforded management the opportunity to engage in alleged fraud.
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. Tricolor and First Brands serve as cautionary reminders that this premium should probably be higher.
Overall 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).
Figure 1: High Yield Credit Fundamentals are Strong
Valuations fully reflect the combination of favorable supply/demand, strong credit fundamentals, and bullish investor sentiment. As of September 30, 2025. the ICE BofA U.S. High Yield Index spread-to-worst of 299 bps is lower than its historical median and the post-GFC "non-panic" range of 325-525 bps, as illustrated below:
Figure 2: US High Yield Market Spreads
While tighter-than-average high yield spreads are consistent with the current “everything rally” environment, overall yields in U. High Yield remain attractive. Current yields of 7.0% 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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INDEX DEFINITIONS
THE ICE BOFA U.S. HIGH YIELD INDEX
ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. The ICE BofA US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market.
ICE BofA U.S. Corporate Index
The ICE BofA US Corporate Index tracks the performance of US dollar denominated investment grade corporate debt publicly issued in the US domestic market.
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