The primary threat to the high-yield market isn't a wave of corporate defaults, but rather a reversion of the compressed risk premium that investors demand. This premium has been historically low, and a return to normal levels presents a significant valuation risk, even if fundamentals remain stable.

In 1935, amidst massive economic uncertainty following the Great Depression, a new AA-rated corporate bond yielded just 70 basis points over Treasurys. This historical precedent, nearly identical to today's spreads, shows that low credit spreads are not necessarily a sign of complacency and can persist even if economic conditions worsen, challenging typical risk-pricing assumptions.

Don't wait for public credit spreads to blow out as a warning sign. In a system where sovereign debt is the primary vulnerability and corporates are easily bailed out, credit spreads have become a coincident, not leading, indicator. The real leverage risk is hidden in private credit.

Despite rising sovereign bond yields, corporate credit spreads remain tight as fiscal stimulus buoys corporations. This shifts credit risk from the private sector to governments themselves, creating a dangerous divergence where high-yield debt outperforms sovereign bonds, keeping the equity market propped up for now.

With corporate credit spreads at historically narrow levels, investors are not being compensated for the inherent risk. In Richard Bernstein's career, spreads have only been this tight three previous times, each preceding a major credit crisis or market scare (late 1990s, mid-2000s, 2021-22). This suggests a poor entry point for credit.

In a market where everyone is chasing the same high-quality corporate bonds, driving premiums up, a defensive strategy is to pivot to Treasuries. They can offer comparable yields without the inflated premium or credit risk, providing a safe haven while waiting for better entry points in credit markets.

Persistently low high-yield credit spreads, despite global turmoil, don't signal corporate health. This is a structural market shift where the riskiest debt has migrated from public markets to the opaque world of private credit, artificially suppressing spreads and hiding true risk.

While EM sovereign credit spreads are near 20-year historical tights, the asset class remains attractive. This paradox is explained by higher underlying US Treasury rates, which push the 'all-in' yield for investors to compelling levels (above 6%), compensating for the tight spreads and justifying the risk.

Massive government issuance is crowding out private credit and making sovereign bonds inherently riskier. This dynamic is collapsing credit spreads and could lead to a market where high-quality corporate bonds are perceived as safer than government debt, challenging the concept of a 'risk-free' asset.