As the Santa Claus rally continues, spreads in the high yield credit market remain at elevated levels. Through Friday, the Merrill Lynch High Yield Index was at 568 basis points versus its high of 592 on 11/26. Since bottoming on 6/1, the index has risen by as much as 145% in less than a six month span. Below we have updated our chart of prior spikes in high yield credit spreads.
While rising high yield spreads are generally associated with increased levels of risk aversion in the markets, we have found that spikes in credit spreads do not necessarily have a negative impact on the stock market. For example, in 1998, spreads widened by a similar margin, and while the market didn't perform great during the period while spreads spiked, once they stabilized, equities ended up performing very well.