Junk bond spreads flash rare calm as recession risks pile up

Junk bond spreads recession watchers usually follow are sending a strangely calm signal, even as Brent crude has surged and private-credit strains have deepened, according to MarketWatch columnist Mark Hulbert.

Hulbert wrote that the U.S. bond market appears unusually relaxed about the chance of an economic downturn. His focus is the high-yield bond spread, a gauge of how much extra yield investors demand to own riskier corporate debt instead of U.S. Treasurys.

That extra yield is supposed to rise when recession risk climbs, because lower-rated borrowers may have a harder time paying their debts. It tends to shrink when investors see less danger ahead.

What are junk bond spreads saying about recession risk?

According to Hulbert, they are saying less than many investors might expect. At the end of June, Brent crude was trading at $73 a barrel and the junk-bond spread was 2.75 percentage points. With Brent recently near $100 a barrel, the spread stood at 2.68 percentage points.

Hulbert noted that a seven-basis-point move is small by itself. He argued that the decline becomes more striking because higher oil prices can add pressure to the economy, yet the bond market has not demanded more compensation for holding junk debt.

The calm also comes as private credit shows signs of stress. In its report on the state of private markets in 2026, MSCI said 15.7% of loans in private-credit funds had been marked below 80% of principal, which it described as a rough distress threshold. MSCI also said more than 10% had been marked below 50%, a level it associated with deep distress or restructuring risk.

MSCI’s figures reflected private markets at the end of the third quarter of 2025, the latest period available in the report cited by Hulbert. Hulbert wrote that private-credit conditions have worsened since then, while the junk-bond spread has narrowed from 2.80 percentage points to 2.68.

Why investors may be watching history

Hulbert said the current spread is lower than at any point since the period just before the 2008 global financial crisis. He added that, since 1997, the only other time the spread was lower was near the peak of the dot-com bubble.

His analysis also points to mean reversion. In plain English, that means a market measure that moves far from its average often later moves back toward that average. Hulbert said past data show the junk-bond spread has tended to rise after dropping well below its average, and fall after rising above it.

He wrote that the differences in his historical comparison were statistically significant at the 95% confidence level, a common threshold used to judge whether a pattern is likely to be meaningful rather than random.

That history, Hulbert said, suggests a high probability that the junk-bond spread will be wider over the next year or two. He cautioned that this does not say whether Treasury rates themselves will be higher or lower, because the spread can widen under different interest-rate conditions.

How Hulbert says investors could hedge

For investors seeking protection against a wider spread, Hulbert described a hedge that pairs two positions: buying a U.S. Treasury index fund and shorting an equal dollar amount of a high-yield bond fund.

The point of the trade, as he described it, is to reduce exposure to broad interest-rate moves and focus instead on the gap between safer Treasury debt and riskier junk bonds. Hulbert said the hedge would benefit if junk-bond yields rise more than Treasury yields.

He also pointed to recent episodes when spreads widened fast, including the start of the COVID-19 lockdowns in 2020 and again in 2022 and 2023. For now, his warning is blunt: the junk-bond market is priced for calm, while several risk signals are moving the other way.

This story draws on original reporting from MarketWatch.