The month of May was a tale of two parts for the high-yield corporate bond market. Early in the month, despite a sell-off in virtually all things "risk" related, "junk" bonds held up quite well. During the first two weeks of the month, the high-yield spread, as measured by the BofA Merrill Lynch U.S. High Yield Master II Option-Adjusted Spread, barely budged. After closing April at a spread to Treasuries of 604 basis points, on May 11, the high-yield spread had actually narrowed 2 basis points for the month. Furthermore, the ratio of advancers to decliners was up six of the first nine trading days with only three days of a slightly negative ratio. In terms of the popular high-yield corporate bond ETFs, HYG and JNK were down only fractionally through the first two weeks of trading. At the same time, the S&P 500 (SPY) was already down 3.18% by May 11, and commodities such as gold and oil, as well as the "commodity currencies," were getting sold off pretty hard early in the month.
Then came the third week of trading, and the high-yield market began to play catch-up. The advance-decline ratio deteriorated in a big way (see table below), and the spread to Treasuries began to widen, eventually closing May at the month's high of 696 basis points. HYG began a strong four-day sell-off on May 14, taking it down 3.79%. Similarly, JNK also experienced a four-day sell-off beginning May 14, which took it down 3.84%.
Corporate Bonds Advance/Decline Ratio
Source of underlying data: FINRA
To provide some perspective on the current spread, during the financial crisis, it reached 2,182 basis points on December 15, 2008 before beginning a long decline that ended on February 21, 2011 at 452 basis points. In 2011, the spread peaked at 910 basis points on October 4, the same day the major equity indices bottomed for the year. You might be interested to know that during the 2000 to 2002 bear market in stocks, the high-yield spread also peaked on the same day the S&P 500, Dow 30, and Nasdaq bottomed. On that day, however, the spread reached 1,120 basis points, much higher than last fall's number and much higher than where we are today. So, while the high-yield market did weaken noticeably during the second half of May, there is quite likely a long way to go if investors decide it's time to price in a recession.
Also of note, the coal industry, which is littered with junk-rated debt, continued to suffer. Patriot Coal's (PCX) 4/30/2018 maturing, 8.25% coupon note, CUSIP 70336TAC8 plunged on bankruptcy rumors and reached a yield of 32.946% (37.287 cents on the dollar) on May 22. If you are currently contemplating an investment in Patriot Coal and are looking for an idea other than simply purchasing the stock, my article, "Before Bottom Fishing For Patriot Coal, Consider This," might be of interest. If you are more interested in investing in some of the coal related bonds holding their own in recent weeks, Peabody Energy's (BTU) 9/15/2020 maturing, 6.50% coupon note, CUSIP 704549AH7 and its 11/1/2026 maturing, 7.875% coupon note, CUSIP 704549AF1 are two to keep on your radar screen.
Other noteworthy news includes Vanguard's closing its High-Yield Corporate Fund to most new investors. I discussed this and some alternatives for high-yield investors in my article, "Vanguard Closes High-Yield Fund To New Investors."