The high yield giant's fair value would put the BAML U.S. High Yield Master II index at a spread of 536 basis points to Treasurys vs. 469 bps at Wednesday's close. Fridson calculates fair value with a regression formula plugging in credit availability data, economic numbers, Treasury yields, and the current default rate.
Today's overvaluation of 67 bps remains less than the year's peak of 130.
Overvaluation in high yield typically doesn't last long, says Fridson, as bondholders tend to be sellers into the better pricing. "You can be pretty confident that if you are in an overvalued state, within a few months it will get back to fair value."