--- title: "The bond market hasn't been this calm since the dot-com bust and the financial crisis. History warns of a rude awakening." type: "News" locale: "en" url: "https://longbridge.com/en/news/293774938.md" description: "High-yield bond spreads are near historic lows, mirroring conditions before the dot-com bust and 2008 financial crisis. Despite rising oil prices and deteriorating private-credit markets, investor concern remains low. Historical data suggests these spreads are mean-reverting and likely to widen significantly in the next one to two years. The author recommends hedging against this potential widening by buying Treasury index funds while shorting high-yield bond funds." datetime: "2026-07-24T15:22:06.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/293774938.md) - [en](https://longbridge.com/en/news/293774938.md) - [zh-HK](https://longbridge.com/zh-HK/news/293774938.md) --- # The bond market hasn't been this calm since the dot-com bust and the financial crisis. History warns of a rude awakening. By Mark Hulbert Junk-bond spreads are near the lows reached before the financial crisis of 2007-09. Here's how to hedge before the market wakes up. Investors in high-yield bonds don't seemed too concerned about a U.S. economic slowdown. For all the current economic and geopolitical turmoil, the U.S. bond market is remarkably sanguine about the risks of a U.S. economic recession, even after oil's big price jump. To appreciate the bond market's seemingly unconcerned behavior, consider the high-yield bond spread, which represents the additional compensation bond investors demand for incurring the extra risk that high-yield ("junk") bonds represent relative to U.S. Treasurys. The junk spread rises along with the risk of recession, when issuers of high-yield bonds become less likely to be able to repay, and it falls when the risk of an economic downturn is lower. At the end of June, when a barrel of Brent crude (BRN00) was selling for $73, the junk spread stood at 2.75 percentage points. Currently, with Brent crude near $100 per barrel, the spread stands at 2.68 points. While a 7-basis-point decline is not in itself particularly meaningful, it is highly significant in light of the increased likelihood of economic distress to which the higher oil price leads. In addition, we shouldn't forget that oil's recent spike comes on top of a private-credit market that has already been struggling. In its recent report on the state of private markets in 2026, MSCI writes that this market is facing problems even deeper than previously known: "Among loans in private-credit funds, 15.7% have been marked below 80% of principal - a rough threshold for distress - and more than 10% are now marked below 50% - a level typically associated with deep distress or risk of restructuring." MSCI's report reflected the state of private markets at the end of 2025's third quarter, the latest period for which data were available. Since then, conditions in the private-credit market have deteriorated even more, but the junk spread has narrowed rather than widened - to 2.68 percentage points from 2.80. Moreover, as you can see from the chart above, the junk spread is now lower than at any time since immediately prior to the 2008 global financial crisis. The only other time since 1997 that the spread was lower than today came near the top of the dot-com bubble. We don't need to be reminded what happened after that. As you can also see from the chart, the spread is strongly mean-reverting: Whenever the spread has dropped significantly below its average, it soon rose back to that average - or higher. The reverse has been true whenever the spread rose above its average. This mean-reverting tendency is measured in the table below. Each of the differences between the numbers in the two rows is significant at the 95% confidence level that statisticians often use when assessing whether a pattern is genuine. This history implies a high probability that the junk spread will be significantly higher within the next year or two. Note that, even assuming the spread expands, we can't predict whether Treasury rates themselves will be higher or lower. That's because the spread can widen even as Treasury rates rise, so long as high-yield spreads rise even further. Insuring against a widening junk spread The lowest-risk bet on a widening junk spread is buying a U.S. Treasury index fund while shorting an equivalent U.S. dollar amount of a high-yield bond fund. In this way, you will be largely hedged against changes in interest rates across the credit spectrum. You will profit from the hedge whenever junk-bond yields rise more than Treasury yields, and if junk yields decline, they fall less than Treasurys. The chart above shows that, much of the time, the two halves of this hedge tend to rise and fall together. That occurs when there is no significant change in the risk of an economic decline. But when that risk spikes, the spread quickly widens - as it did in 2020 at the beginning of the COVID-19 pandemic lockdown and again in 2022-23. And a widening spread will cause this hedge to profit nicely. Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com. \-Mark Hulbert This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal. 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