Not so “junk” after all

In the recent market shakeup, equities showed real volatility, with VIX reaching levels in the high 50’s, similar to the ones we’ve seen in market crises. We should have seen high yield spreads widening as well, perhaps to an equivalent level of panic. But we didn’t. And perhaps the reason is showed in the picture below: there has been basically no new issuance of High Yield paper YTD in 2025, in absolute terms and also in relative terms to the prior 4 years through April. High demand for cash flow and decent yields, despite the fact that spreads have been close to historical minimums, combined with no supply, have resulted in a more stable than usual credit markets. Even more stable than treasuries. Some companies with rating below investment grade, still have very low cost of funds, since they issued a lot of paper in 2020 and 2021, benefiting from low base rates and narrow spreads. It’s interesting to see that junk bonds have not performed as risky assets in this episode, at least so far. And we have not have a proper credit cycle in a while, since the Fed intervene during Covid to provide support to markets. Interesting to see how supply will end the year, and how will that affect spreads of volatility continues.

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