Will High Yields Crack the Market’s Resilience?

Current interest rate levels remain appropriate as robust global growth and above-target inflation suggest the economy is running hot rather than being stifled by restrictive policy. While broad market indices appear resilient, significant stress is emerging under the surface, particularly in the "weaker tails" of the market. Spreads on triple-C rated credits have widened, and over half of the 3,000 largest U.S. stocks have experienced drawdowns of at least 20% since yields began rising in June. This divergence mirrors the 2005 market environment, where simultaneous booms in AI spending and government deficits—much like the China CapEx and U.S. housing booms of the past—pushed rates higher, sustaining the overall economy while quickly challenging indebted companies. Consequently, an upper-quality investment bias is necessary, favoring high-yield bonds over loans and anticipating further decompression across credit indices as weaker firms struggle to balance higher debt costs.