One area of the financial markets that we constantly monitor for signs of confirmation or divergence in the trend for equities are spreads between interest rates on high yield debt and comparable treasuries. High yield debt is far out on the risk spectrum of fixed income, so it tends to have a closer correlation to equities. Therefore, when stocks are rising, we typically see spreads on high yield debt tighten as investors have a bigger risk appetite. Conversely, when equities decline you see spreads on high yield debt normally widen as investors demand more in the way of yield to compensate for the added risk.
Over the last four weeks, we have seen a divergence between high yield spreads (red line) and the S&P 500 (blue line). Whereas the S&P 500 has kept rallying, high yield spreads have been widening (in the chart below spreads are shown on an inverted basis). The question now is should you be worried?