Significant bottom in high-yield spreads

Growing risk aversion could lead to strong negative repricing

Despite a weak closing to the month, risk assets have been remarkably resilient in 2025. Both the Nasdaq 100 and S&P 500 hit all-time highs in February, despite weakness in cyclical industries like autos, a disappointing earnings season from the Magnificent Seven companies, and the incoming trade war between the United States and its primary trading partners. To us, it looks like technical factors have been supporting the market in the face of deteriorating fundamentals. Eventually, fundamentals will determine asset prices.

It is increasingly likely that the January low in high-yield spreads will be a significant bottom. Once the market puts in a bottom in risk premiums, there can often be a strong negative repricing event in the following six months, as widespread complacency is replaced with risk aversion.

While spreads have widened out since January, Treasury yields have declined by a similar amount, resulting in limited price volatility and a scarce opportunity set for trading.

In early March with spreads just inside of 300 basis points (bp), we believe that the market is still a long way from being cheap. If Treasury yields stay close to current levels, we would need to see at least a 400 bp high-yield market before becoming constructive. If a spread-widening event coincided with a significant Treasury rally with lower Treasury yields, we would target closer to 500 bp.

It appears to us that a regime shift is occurring in markets, as the reality of a trade war has upended previous assumptions about global trade, which should result in higher risk premiums. Major shifts like the one occurring now take time to get priced into assets. The powerful rally in risk assets in 2023 and 2024 has created strong muscle memory for many market participants that every dip is a buying opportunity. This “buy-the-dip” impulse will take time to work through. We believe that patience and discipline are appropriate given current valuations, as the market is particularly vulnerable to any unexpected outside shocks.

Our focus for now is on higher-quality and shorter-duration positions, where liquidity is priced appropriately.

Justin Jacobsen, CFA, is the Portfolio Manager of the Pender Alternative Absolute Return Fund at PenderFund Capital Management. Excerpted from the Pender Alternative Absolute Return Fund Manager’s Commentary, February 2025. Used with permission.

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