High Yield Credit Spreads at Post Bear Stearns High

High yield credit spreads as measured by the Merrill Lynch High Yield Index are currently at their widest levels since the bailout of Bear Stearns in March.  At a level of 823 basis points, high yield corporate bonds are currently yielding 8.23 percentage points more than comparable treasuries. 

Credit spreads are often looked to as a leading inverse indicator of stock market direction, so rising levels are generally considered bearish for the market.  However, conventional wisdom and reality can often differ. 

The chart below compares the S&P 500 (inverse) to high yield spreads so far in 2008.  As shown, the two have moved in tandem with each other throughout 2008, although we would note that rather than being a leading indicator of stocks, moves in credit spreads have tended to be coincident with moves in the S&P 500.

click to enlarge

Comments

[locke:]

Looks like the stock market is leading the bond market in this pic...

2008 Aug 20 10:46 PM

[whidbey:]

Inverse correlation is not causation. I suspect that both credit spreads and the SPX are both responding to perceptions of risk. Stocks fall when credit risks rise. The fear of more financial write downs is likely the lynch pin. Are you men economists, or just sensation seeks? Poor post. Z

2008 Aug 21 03:36 PM

[User 4166:]

Good post on high yield credit spreads.......please continue such posts and their associated charts.

2008 Aug 21 05:03 PM

[jahowle:]

Not an eye opening observation. What should be taken away from this graph is the fact that credit spreads are continuing to widen and will probably do so until they take out the July 15th low in the inverterd chart. Because the common is simply a long term option on the assumed future cash flows and are junior to the bonds they should be more volatile and lead the turns in the market.

2008 Aug 21 10:56 PM