Thin cushion: what EM HY spreads really pay for

Research evidence excerpt

Thin cushion: what EM HY spreads really pay for

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EM Corporate Strategy

Thin cushion: what EM HY spreads really

pay for

Preference for HY, but selection matters 23 July 2026

We forecast a 9.0% EM HY total return in 2026, more than double the 4.3% expected for EM Corporate Strategy

IG (see Mid-year review). The return engine is more the all-in yield of 7.6%, comprising Global

the Treasury base rate and a 308bp credit spread, than broad spread compression, which Anne Milne

we believe is largely behind us. With spreads tight, the main question is what investors Research Analyst

are being paid to absorb. The answer favors issuer selection over broad beta exposure. BofAS+1 646 855 4096

anne.milne@bofa.com

HY Spread = expected loss + residual compensation Bruno Larcher

We assess HY spreads by decomposing it in expected credit losses for the EM HY asset ResearchMerrill LynchAnalyst(Brazil)

class as a whole and residual excess spread. Expected loss equals the NTM estimated +55 11 2188 4010

bruno.larcher@bofa.com

default rate multiplied by loss given default, while the residual compensates for liquidity,

volatility, model uncertainty and other non-default risks. This framework directly links CarlosResearchAssumpcao,Analyst CFA

valuations to defaults and recoveries, providing a more informative measure of the Merrill Lynch (Brazil)

+55 11 2188 4025

cushion embedded in HY spreads. carlos.assumpcao@bofa.com

Recovery averages 43%, but dispersion is wide GEMSBofAS Corporate Credit Rsch

+1 646 855 4096

We estimate that defaulted EM corps recovered on average 43.1 cents on the dollar,

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measured as the face-value-weighted price 180 days after default between 2013-25.

However, outcomes varied substantially across sectors and cycles.