Are wide spreads a signal to buy? Our chart looks at high yield bonds amid the recent sell-off and compares correlation vs. the Q4 2008 sell-off.
April 3, 2020 | 1 minute read
As markets have experienced an unprecedented sell-off over the past month, investors may have had trouble finding places to hide. In many cases, correlations across major sectors and traditional asset classes have spiked to a greater degree than during the global financial crisis.
Amid the historic sell-off, high yield bond spreads (defined as the yield above the risk-free Treasury rate) breached an important threshold, reaching 900+ basis points.
This is noteworthy because in the 25 instances since 1987 where high yield spreads have reached 900 bps or more, the median annualized 1-, 3- and 5-year forward return was 37%, 21% and 17%, respectively.1
In all, high yield bonds have returned -14.2% from the market’s peak on February 19 compared to -23.0% for the S&P 500.2 Put another way, loans and high yield bonds have captured roughly just 58% and 62% of the equity downside, respectively, compared to 102% and 78% of the equity downside during the sell-off in Q4 2008.
While past performance is never a guarantee of future returns, buying into credit markets when spreads are as wide as they are today has historically rewarded investors.
Private credit has increasingly become the preferred source of financing for PE sponsors, with direct lending volume jumping 60% over last year’s level.
