High Yield Credit Spreads Are Showing Cracks

What CCC Credit Spreads Reveal About the Next Correction

 High yield credit spreads deserve a closer look right now and the data isn’t as comfortable as the headline yields suggest. Start with the ICE BofA CCC & Lower US High Yield Index Total Return Index, a total return index where coupons are reinvested.

Below is a 10-year chart of the index, courtesy of TradingView.

First, we have chosen this particular index because it represents credit obligations most vulnerable to default. There is an ETF, XCCC, that provides exposure to CCC-rated US corporate debt. However, the ETF does not have as long a history as the index itself. Also, it does not track this particular ICE BofA index.

The index is yielding around 15% per year right now. As our readers can see for themselves, it has averaged about 7% per annum, with reinvestments, for the last 10 years. In addition, it has averaged about 12% per annum for the last 3 years. Usually, the returns of such securities are highly correlated with credit availability and equity performance. Undoubtedly, equities and high-yield securities have had a really spectacular 3 years. Therefore, it is not surprising to see the index performing well.

Reading the Chart

Second, we have chosen an indicator for that chart — the Bollinger Band with a 200-day moving average and a 2-standard-deviation band. In that sense, the moving average is the 200-day simple moving average. The band around it represents 2 standard deviations from that moving average.

We have chosen that indicator because, in our opinion, it correctly captures market positioning. A rising moving average indicates positive momentum; a falling moving average, negative momentum. Wide bands indicate large capital reallocations; tight bands indicate a lack of capital reallocations.

We want you to draw your attention on the last 12 months. Since August 2025, the performance of the Total Return Index has been negative. Despite the fact that the average security in the index has a maturity of around 5 years and yields around 15% per annum, holders of such securities have not realized ANY returns over the last year. Even when taking coupons into account, returns were not realized.

Moreover, with the 200-day deviation band so narrow, that lack of positive return has not been accompanied by market volatility or a large credit event. Rather, it suggests a lack of new capital coming into the market.

High Yield Credit Spreads vs. Equities

We will now take a look at the same index, but instead of total return or effective yield, we will look at the spread — the interest rate over relevant US Treasuries. Below is a 30-year chart of the index spread. We will also put another chart just below it — a 30-year chart of the SPY ETF, both courtesy of TradingView.

It is not as easy to see, but it is certainly true that the SPY ETF and high yield credit spreads are strongly negatively correlated. That means that higher readings of the credit spread index are associated with negative performance of the SPY ETF.

Correlation in itself does not imply dependence, but from the economic theory of the business cycle, we know there is a strong relationship. Readers who want the mechanics behind this relationship can find more in our guide to how the credit cycle drives equity markets.

What the two charts imply is that the really low credit-rating names — CCC and below — are already showing negative pricing dynamics. Usually, such credit contractions result in equity corrections.

Moreover, from a purely historical point of view, such large credit contractions occur every 5–10 years. Here are the last four: 2001, 2009, 2016 and 2020.

Yes, historically speaking, credit markets are due for a large correction that may already be underway. Usually, such a credit contraction results in a correction in equity markets.

However, that is what usually happens.

Could this time be different?

Yes, of course it could.

But what if it is not different?

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