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.