High yield bonds yields and spreads diverge
Source: Bloomberg Finance, L.P., as of Aug. 9, 2023. High yield bonds represented by the ICE BofAML High Yield Master II Index. Spread to worst refers to the Index’s yield above Treasuries.
- Credit markets have fully participated in what has largely been a risk-on year for markets. High yield bonds have returned 6.7% year to date amid growing hopes for an economic soft landing, improved investor sentiment and notable spread compression.1
- Spreads on high-yield bonds recently tightened to their lowest point of the year, driven by a combination of resilient economic growth and moderating inflation in the U.S., hopes for a potentially more dovish turn by the Federal Reserve and a supportive supply-demand dynamic.1
- Despite the spread compression, high yield bond yields (approximately 8.5%) have remained elevated throughout 2023, as the chart shows.1
- In fact, the market’s higher level of income puts it in a position to offset some potential price declines should spreads widen if volatility escalates. Based on the high yield market’s sensitivity to changes in spreads (spread duration), spreads could widen approximately 200 bps before price declines would offset the current yield.
- Amid a backdrop of elevated yields and solid fundamentals, high yield bonds—and credit more broadly—may offer an attractive entry point, especially compared to today’s notably expensive stock market.
