The high yield spread (average yield of high yield bonds versus corresponding treasury security) has ticked in at 5.84% over treasuries, increasing borrowing costs for lower credit companies materially. The HY spreads up materially from the 4% long term average1. However it isn’t up at crisis levels of the past.
Verdad capital’s research indicates that:
Usually, high-yield spreads continue to rise after they hit 6.5%, peaking a few months later. This is also when the impacted equities stock prices are most precipitously affected, representing the optimal time to buy.
Verdad Capital
Note that Verdad indicated that 6.5% wasn’t an absolute line, and 6% or 6.25% would yield similar statistical results, just that 6.5% represented 1 standard deviation from the 4% mean.
Given that the current HY spread is near 6%, are we near a “financial accelerator” in which spreads continue to rise or are they peaking? One interesting comment:
Levered loan defaults have been at near historic lows, and one could expect that they start to rise as high yield markets telegraph that defaults are to rise. But in today’s somewhat unprecedented environment, in which the average B rated fixed coupon is below the current treasury yield, levered loans are an interesting niche.
We own select levered loan portfolios and continue to add modestly as market stress increases.
1 – https://static1.squarespace.com/static/5db0a1cf5426707c71b54450/t/5e57b290304a016161c46d62/1582805651161/Crisis+Investing+-+Verdad+Advisers+Ebook.pdf