What’s up with CCC-rated bond spreads?

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Everyone loves credit. We know this must be true because credit spreads — the extra yield you get paid for abandoning US Treasuries and hanging out in the less liquid and more default-prone world of corporate credit — are extremely skinny. In fact, you have to go all the way back to 1998 to find a time when you were offered less to take investment-grade credit risk.

Sure, this isn’t true for every individual credit. Holders of SpaceX and Oracle debt continue to have their portfolios punished on an almost daily basis for the folly of having lent to the two hyperscalers. But the average public investment-grade and high-yield credit spread of almost every rating band has fallen to multi-decade lows. The exception has been triple-C rated bonds.

Readers may recall that triple-C credit carries that label when rating agency analysts reckon the issuer has a roughly 50-50 chance of default over the next five years or so. And before people get fussy about rating agency analysts being not very good, the data suggests that when it comes to forecasting defaults, they are:

When the best that can happen is getting paid a coupon and being repaid your principal, lending to companies with such a high default risk might seem pretty stupid.

But despite the comparatively humongous default risk that buyers run by dipping their hand in the blood of the junkiest of rated junk, things have actually worked out pretty well for holders. In fact, holding CCC-rated corporate credit has delivered stronger excess returns over US Treasuries than holding any other band of rated credit over the past five, ten and twenty-year holding periods:

Lately though, triple-C bonds have had a bit of a shocker. While high-yield bonds have, in general, made money for investors this year, that is not the case for triple-Cs.

And this is a bit weird. While not exactly a secret, it isn’t always widely known outside of credit types that spreads for overall credit rating bands tend to move pretty tightly in sync. This usually means that if high-grade credit does well, lower-grade credit does amazingly.

Want to know where double-Bs trade? Probably about 1.8x the spread of triple-Bs. What about triple-Bs? They’re probably around 1.6x the spread of single-As. Or at least, spreads have been within 20bps of these ratio levels around two-thirds of the time over the past thirty years.

Sure, triple-C spreads are a bit more variable. They average around 2.1x single-B spreads. Right now they’re more like 3.4x — which is the highest they’ve ever been since records began. Admittedly, records began only about 30 years ago. But the rising multiple signifies that anyone taking a leveraged bet on credit through CCC bonds has done really, really badly.

We got in touch with Neha Khoda, a credit strategist at BofA, to ask what the heck is going on. She told us — and we paraphrase — that while CCC high-yield bonds have been pretty awful, they’ve been nowhere near as awful as CCC loans. And it’s true. The Morningstar LSTA CCC Loan index has lost investors around 3.3 per cent of their money so far this year — a worse performance even than leveraged loans to software companies.

If we’re reading PitchBook data correctly, the average price of the 115 CCC-rated loans with a collective face value of around $100bn has dropped from around 83 cents in the dollar a year ago down to 71.5 now, pushing their yield up to a little over 27 per cent — up from just under 20 per cent a year ago. 27 per cent sounds a lot.

Khoda also pointed us to the wide dispersion of spreads and individual bond returns beneath the surface. And yes, the range of spreads attached to index constituents is wildly variable.

The largest issuer of US dollar triple-C bonds is CSC Holdings LLC, a US cable TV company better known as Optimum Communications (formerly Cablevision). Its $15.5bn of bonds trade at distressed levels, at an average spread of more than 3,500bps over US Treasuries. High-yield investors might know it as Altice USA, the American operation of Patrick Drahi’s sprawling empire.

These bonds trade a world away from those issued by the second-largest issuer of US dollar triple-C bonds — Altice France — the French operation of Patrick Drahi’s sprawling empire. Its $6.9bn of bonds trade at an average spread of just 309bps over US Treasuries.

It would be fun if the third largest issuer in the index was another arm of Patrick Drahi’s sprawling empire. But Altice Financing is only the fifth largest issuer. It borrows on behalf of Drahi’s Portuguese, Dominican and Israeli telecoms businesses and was accused of defaulting on a €2bn portion of its debt earlier this month.

Anyway: in easier-to-read-but-less-fun-chart terms, the distribution of triple-C bond spreads is absurd. The right-hand tail is so long we’ve had to cut it off and group bonds with an additional yield above US Treasuries of more than 15 per cent in a single bucket, and this is almost (but not quite) the modal bucket. By our calculations this bucket of bonds contributes almost sixty per cent of the overall index spread.

Put another way, only about a quarter of bonds by index weight have a spread that is greater than the average index spread. The market is a weird ragbag of performing and barely performing companies teetering, or also not at all teetering, on the brink of collapse.

The triple-C scene is not what it used to be. The par value of triple-C high-yield bonds peaked at about $240bn back in 2009 but now sits at only $140bn. Over the same period the rest of the high-yield market has more than doubled in size, shrinking triple-Cs down to a lowly 8 per cent of the market.

Since then, sketchier issuers have been migrating out of public markets in favour of private pastures. And it seems reasonable to infer that this migration has been at least partly (and perhaps entirely) responsible for the diminution of the junkier end of high-yield credit.

Khoda tells us that during 2023-24 “the average loan getting refinanced into PC [private credit] from BSL [broadly syndicated loans] was B3.” Meanwhile, while loans getting refinanced out of private credit into BSL were rated B2, “which has helped improve loan index credit quality”. And:

… once a deal enters the PC market, it’s essentially unrated and we can’t bucket it within our normal rating cohorts. So we cannot trace “CCC loans in PC”.

This trend has abated since mid-2025, says Khoda. Coincidentally or not, this is about the time that private credit cockroaches began to make headlines and business development companies began to fall under the microscope.

Outside of BDCs, we receive no information from private credit funds about the performance (or otherwise) of their holdings.

And so, given the ongoing malaise across the BDC complex, it doesn’t seem unreasonable to assume that the kind of lumpy idiosyncrasies causing trouble for the junkiest of junk in the public markets are also going to be popping up across private markets too.

Additional reporting by Euan Healy