The Risk-On Rally Continues
The public high-yield bond market has entered a state of aggressive optimism, with credit spreads compressing significantly heading into the year-end. As of December 24, 2025, the ICE BofA US High Yield Index Option-Adjusted Spread has tightened to 2.84% (284 basis points), down from 2.95% just a week prior. Breaking the psychological floor of 300 basis points signals that public markets are firmly in “Risk-On” territory, driven by investors exhibiting a robust appetite for risk as they chase yield in a capital-rich environment.
Sector Breakdown: Pricing for Perfection
The compression is visible across the credit spectrum, indicating a broad-based hunt for returns rather than a sector-specific anomaly. The Single-B Index—often a bellwether for true speculative appetite—closed at 2.96%, while higher quality BB-rated bonds are trading at an exceedingly tight 1.72% over Treasuries. When spreads are this narrow, the market is effectively “priced for perfection,” implying that investors see little probability of default or macroeconomic disruption in the near term.
For issuers, this environment offers a window of exceptionally cheap capital. Public borrowers are currently able to lock in rates that historically reflect investment-grade stability rather than speculative-grade risk. However, this tightness also suggests that covenants are likely loosening, as leverage shifts in favor of borrowers over lenders.
The Bond Capital View: Discipline in an Overheated Market
While the tightening of spreads is a positive signal for broad economic sentiment, it presents a distinct challenge for disciplined capital allocators. In moments of market exuberance, public credit often ignores fundamental risks to deploy cash. At Bond Capital, we view sub-300bps spreads as a signal to heighten, not relax, our diligence.
When public markets are priced for perfection, the margin of safety erodes. While banks and public funds may aggressively loosen terms to win deals in this environment, Bond Capital maintains strict credit discipline. We focus on structure, downside protection, and lending against tangible value rather than chasing the lowest available yield. For our investors, this means prioritized capital preservation; for our borrowers, it means partnership with a lender that remains steady even when the inevitable volatility returns.
