Stocks and commodities aren't the only things pulling back of late. High-yield debt, after holding up well in the first half of May, has joined the party as well. Despite the fact that the SPY is still up on the year, high-yield spreads have now widened to their highest levels of 2012. On Friday, June 1, the BofA Merrill Lynch U.S. High-Yield Master II Option-Adjusted Spread reached 7.16%, up from 5.96% just one month prior.
When breaking down the high-yield market into BB-, B-, and CCC-rated bonds, we discover that BB and B spreads have widened to their highs of the year, whereas CCC is actually still 51 basis points narrower than its Jan. 3 high of 13.11%. Along with the widening of spreads, the three well-known high-yield ETFs -- HYG, JNK, and PHB -- are now all trading at discounts to net asset value. HYG closed at a discount of 0.93% on Friday, and JNK and PHB closed at discounts of 0.87% and 0.38%, respectively (don't confuse closing discounts with bid/ask midpoint discounts sometimes reported).
For investors interested in a bit of perspective on how high spreads have gone in prior years, the table below should help. It shows the highest spread of the year for the BofA Merrill Lynch U.S. High-Yield Master II Option-Adjusted Spread dating back to 1997:
High-Yield Master II Option-Adjusted Spread
Finally, keep in mind that while spreads are reaching new highs for 2012, effective yields are actually closer to their lows of the 2004 to 2007 time period than anywhere near their highs of the past two recessions. Ultra-low Treasury yields (TLT) help explain why it is that spreads can be as wide as they are with yields as low as they are.
Disclosure: I am long HYG, individual Treasury bonds, and individual corporate bonds. I am also long individual stocks and gold.