High Yield Credit Rally Really Rolling

Summary

• Credit markets have been flying.
• The back half of May has been a very good period for high yield investors as spreads have run almost 200 bps tighter.
• They’re now at the tightest levels since the March blow-out in spreads as US equities plunged into the fastest bear market since the Depression.

While the US equity rally has been more “slow and steady” than “big and bold” in the last couple of weeks, credit markets have been flying. In the chart below we show the spreads on CDX HY, the index of high yield credit default swaps used as a reference for junk bond markets. As shown, the back half of May has been a very good period for high yield investors as spreads have run almost 200 bps tighter. They’re now at the tightest levels since the March blow-out in spreads as US equities plunged into the fastest bear market since the Depression.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[Shellymig]

Basic questions--What are the 2 rates the "spread" is measuring?; and how does a increasing/decreasing "spread" work to the benefit/detriment of the high yield investor?

[jprizzuto]

@Shellymig - in a general sense, that chart is a measure of the spread (the difference) between the yields on junk bonds and treasuries.

when the spread gets very wide, as it did in march, investors are selling junk bonds and buying treasuries in a risk-off trade; junk bond yields go higher, treasury yields go lower.

when the spread gets tight (or narrow) as it has lately, investors are buying junk bonds and selling treasuries in a risk-on trade; junk bond yields go lower, treasury yields go higher.

[docstox 12]

With the MMT Keystroke Kurrency FED buying up high yield and one year CD's and Money Markets earning close to zero, is it any wonder?

[fujilomi]

Yup, there is a frantic search for yield, and high yield investors think the FED has their backs. But watch out if the FED ends support, will probably continue support for Treasuries though, too much debt to refinance. Probably need high inflation/employment to recover to let Treasury swim naked alone, mandates may kick in.

[r cohn]

This is not a frantic search for yield; this is nothing more than the perception that the FED is buying high yield ETFs , without regard to yield.

[fujilomi]

r chon-Uh, maybe you like .10% yield for short term Treasuries vs 17% for BDCs. I see it as a big difference that fuels a frantic rush to risky stuff, old folks like me need a bigger return. If I could get even 2% I probably still would park money in short term Treasuries, but now might as well just hold cash instead of tying money up for not much return. Even paying over call prices for BBB stuff is not too attractive. Yield matters in the risk/reward equation.