High-Yield Defaults: Canary in the Coal Mine?
Do the recent bankruptcies of auto parts supplier First Brands Group and subprime auto lender Tricolor Holdings signal broader problems in the high-yield corporate bond market? While discussing his company's losses from Tricolor, JPMorganChase CEO Jamie Dimon observed: "When you see one cockroach, there's probably more."
While the above are just examples for illustrative purposes only, it's an open question whether these bankruptcies—along with some other bad loans by a couple of regional banks—were isolated incidents or the proverbial canaries in a coal mine.
We think it's somewhere in between. After rising steadily in recent years, the default rate has leveled off recently. The relatively strong fundamentals among high-yield issuers could keep the rate from going much higher. The future course of the default rate is only part of the story, though.
For corporate bond investors, what matters is how much extra yield they can expect in exchange for the potentially heightened credit risk. And today that extra yield is very low. Here's what to know.
Corporate bond defaults have
A few high-profile bankruptcies have made headlines recently, but corporate default rates have been relatively elevated since the end of 2023. A bond default is when an issuer fails to meet its contractual obligations to its bondholders, for example, by failing to make an interest payment or repaying a debt at maturity.
According to Standard and Poor's, the trailing 12-month default rate for speculative-grade debt has been above 4% for the past two years. It was 4.8% as of August 2025.
Moody's default data paints a similar picture. Through September 2025, the trailing 12-month issuer-weighted U.S. leveraged loan default rate was 5.9% (leveraged loans are another type of sub-investment grade debt), while the bond default rate was 3.7%.1
Those default rates are up significantly from their lows of late 2020 through early 2023 and are more in line with historical averages.
According to S&P, the speculative-grade default rate has held above 4% for two years
Source: Standard and Poor's, with monthly data from 8/1/2008 to 8/1/2025.
"Bankruptcies Drive Default Tally For The First Time In 2025," October 16, 2025.
Those rates generally haven't made headlines because many of the underlying defaults have been in the form of distressed exchanges rather than Chapter 7 or Chapter 11 bankruptcy filings. A distressed exchange occurs when a struggling issuer renegotiates its debts with its lenders, perhaps in the form of a principal haircut or maturity extension. This can help the issuer address any issues that may result in a missed interest or principal payment. That said, with high-yield corporate bonds, a distressed exchange is still generally considered a default since the lenders (investors) don't receive what was laid out in the prospectus.
Distressed exchanges have made up 45%, 54%, and 52% of the defaults in 2023, 2024, and 2025 (through August), respectively, according to S&P.2 Distressed exchanges often don't solve the issuer's problems, however. A 2023 study by S&P found that 35% of distressed exchanges resulted in repeat defaults—i.e., a struggling issuer goes on to default again—within a 48-month period.3
Rising defaults don't necessarily mean investors need to abandon their high-yield bond holdings, however. Nor do they mean that the default rate will necessarily rise further from here.
High-yield bond fundamentals are relatively strong. Balance sheets among high-yield issuers aren't as solid as they were when interest rates were at historical lows in the late 2020–early 2022 period, but they still suggest that, on average, companies are generally capable of servicing their debts.
High-yield issuers' ratio of debt relative to earnings is currently lower than it was from 2015 through 2019. (A higher ratio would indicate more debt relative to earnings.) And their ratio of earnings to interest expenses (known as interest coverage) is at the high end of their pre-pandemic 10-year range. (A lower ratio would mean they have high debt expenses relative to their earnings.)
The average interest coverage ratio of the Bloomberg U.S. Corporate High-Yield Index is at the high end of the pre-pandemic 10-year range
Source: Bloomberg Intelligence, from 2Q 2011 to 2Q 2025.
The interest coverage ratio is calculated by dividing a company's earnings before interest and tax by its interest expense for the same period.
Defaults do happen, of course. The default rate may have risen recently, but even with the rate above 4%, it means a very large majority of the high-yield universe hasn't defaulted. What matters more is how investors are compensated for the risk of defaults potentially remaining high, or even increasing.
That extra compensation, measured by credit spreads, is low today. Credit spreads refer to the extra yield that corporate bonds offer above Treasuries with comparable maturities. At just 2.9%, the average option-adjusted spread (OAS) of the Bloomberg U.S. Corporate High-Yield Bond Index is not far off the all-time low of 2.4% from 2007, and it's close to its recent low of 2.5% from last November.
Stated more simply: The "extra" compensation available from high-yield bonds is near historical lows, while credit and default risks are closer to their historical averages.
High-yield credit spreads are very low
Source: Bloomberg, using weekly data from 10/17/2000 to 10/17/2025.
Option-adjusted spreads (OAS) are quoted as a fixed spread, or differential, over U.S. Treasury issues. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.
The default trend among high-yield issuers is also reflected in the recent actions by ratings agencies.
Investment grade bonds have been upgraded more than they've been downgraded in 10 of the last 12 quarters. High-yield bonds have gone the other way, with the number of downgrades exceeding upgrades in each of the last 12 quarters.
High-yield bond downgrades have outpaced upgrades for the last three years
Source: Bloomberg and Moody’s, using quarterly data from 4Q2022 through 3Q2025.
A ratio above one means that there have been more upgrades than downgrades, while a ratio below one means there have been more downgrades than upgrades.
Given those trends, we continue to favor investment grade-rated corporate bonds today. Credit quality in the corporate bond market has generally improved lately, as the upgrade/downgrade chart highlights, and yields are still well above their 15-year average.
The average yield-to-worst of the Bloomberg U.S. Corporate Bond Index was 4.7% through October 17, 2025, more than one percentage point above the 15-year average. In fact, prior to 2022, the index hadn't had an average yield that high since 2009 after the global financial crisis.
Investment grade corporate bond yields are still well above the 15-year average
Source: Bloomberg, using weekly data from 10/17/2010 through 10/17/2025.
Yield-to-worst is the lowest yield that an investor can earn on a bond with an early-call option, barring default. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
It's a different story with high-yield bonds. The 6.8% average yield-to-worst of the Bloomberg US Corporate High-Yield Bond Index is only slightly higher than its 15-year average of 6.7%, and there have been plenty of instances where the average yield was higher—and sometimes significantly higher—than where it is currently.
High-yield bond yields are close to their 15-year average and well below previous peaks
Source: Bloomberg, using weekly data from 10/17/2010 through 10/17/2025.
Yield-to-worst is the lowest yield that an investor can earn on a bond with an early-call option, barring default. Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
What to consider now
High-yield bond defaults have picked up over the last few years, so the recent headline-grabbing defaults are bringing more attention to negative trends that were already happening.
It's too early to tell if these failures signal broader weakness and a potential rise in the default rate, or if the rate will hover in its recent range near 4%. We believe that what matters more for investors is how they'll be compensated if the trend worsens—because the extra yield is low now.
Again, this doesn't mean investors should abandon their high-yield bond holdings. They can still be held in moderation. Higher income payments can help offset potential price declines over a 12-month period. For example, the 6.6% average coupon rate of the Bloomberg U.S. Corporate High-Yield Bond Index means that the average price could fall by roughly 6.6% and investors might not necessarily suffer a negative 12-month total return. As always, investors should be prepared to ride out the ups and downs.
With credit spreads so tight, we still suggest investors consider higher-quality investments, like investment grade corporates. Their average yields are still at levels not seen from 2010 through mid-2022, and their prices should hold their value more than high-yield bonds if the economic outlook were to deteriorate.
1 Source: Moody's, "September 2025 Default Report," October 14, 2025.
2 Source: Standard and Poor's"Bankruptcies Drive Default Tally For The First Time In 2025," October 16, 2025.
3 Source: S&P Global, "Buying Time Post-Default with Private Credit," December 2023.
Find bonds that are right for you.
Explore more topics
All names and market data shown are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.
This material is intended for general informational and educational purposes only. This should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned are not suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decisions.
All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results.
Investing involves risk, including loss of principal.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
This information is not a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager, Estate Attorney) to help answer questions about specific situations or needs prior to taking any action based upon this information.
The policy analysis provided by the Charles Schwab & Co., Inc., does not constitute and should not be interpreted as an endorsement of any political party.
Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
Schwab does not recommend the use of technical analysis as a sole means of investment research.
Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. For more information on indexes, please see schwab.com/indexdefinitions.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively "Bloomberg"). Bloomberg or 'Bloomberg's licensors own all proprietary rights in the Bloomberg Indices. Neither Bloomberg nor Bloomberg's licensors approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.