Bubble or not, the rally in high yield spreads has remained in place to start 2013. Following yesterday's rally, spreads on high yield bonds relative to US Treasuries fell to 516 basis points (bps), or the lowest levels since June 2011. Even after the recent drop, high yield spreads are still well above their bull market low of 453 bps from March 2011. That being said, we would note that back in April 2011, long term Treasury rates were more than 150 bps higher than they are now, so strictly on a yield basis, high yield bonds are lower than ever.
(click to enlarge)The chart below provides a theoretical yield in 10-year high yield bonds. To calculate this yield we added the spread on the Merrill Lynch High Yield Master Index to the yield on the 10-year US Treasury. As shown in the chart, the theoretical yield on 10-year high yield debt fell below 7% in late 2012 for the first time ever. Just like we have seen in the Treasury market in recent months, never before have investors been willing to lend money for less of a return than they are now.(click to enlarge)