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High Yield Spreads Widen: Should You Be Worried ?

TedTed
in Fund Discussions
FYI: One area of the financial markets that we constantly monitor for signs of confirmation or divergence in the trend for equities are spreads between interest rates on high yield debt and comparable treasuries. High yield debt is far out on the risk spectrum of fixed income, so it tends to have a closer correlation to equities. Therefore, when stocks are rising, we typically see spreads on high yield debt tighten as investors have a bigger risk appetite. Conversely, when equities decline you see spreads on high yield debt normally widen as investors demand more in the way of yield to compensate for the added risk.
Regards,
Ted
http://www.bespokeinvest.com/thinkbig/2014/7/23/high-yield-spreads-widen-should-you-be-worried.html?printerFriendly=true

Comments

  • JunksterJunkster
    http://blogs.barrons.com/incomeinvesting/2014/07/23/lack-of-liquidity-hampering-high-yield-rebound/?mod=BOL_hp_blog_ii

    More on the most hated asset class. I hate em too but when everyone hates something that is less than 1% off all time highs it has to make you wonder if new highs are dead ahead. Meanwhile junk munis have more than righted themselves and some (EIHYX) are looking at their 7th consecutive month of gains (including dividends) YTD. I am back to 100% junk munis and in hindsight wish I had played EIHYX instead of NHMRX this year. That's because EIHYX, albeit a tad less YTD than NHMRX, has been much steadier especially during the early July selloff (where I stupidly sold and then had to reload again) I do have around 20% there and may switch more from NHMRX whose outperformance YTD can be traced to its sole stock holding - AAL.
  • Mona
    Hi Mr. Junkster,

    What is your opinion of a higher grade Hi-Yield muni in VWAHX?

    Mona
  • Dex
    I put some money into HYD - I think has more to go.
  • JunksterJunkster
    Dex, I hope so. I watch HYD and HYMB intraday but they don't hold a candle to the open end junk munis. For instance, several are outperforming HYD by 2 to 3 percentage points YTD. I am not a fan of ETFs. During the recent selloff HYD declined nearly 5% while the open end declined just over 1% with some such as EIHYX declining less than 3/4 of a percent.

    Mona, VWAHX is too staid both performance and yield-wise for me. Plus, from recent articles, it appears there is a shortage of junk munis as compared to the higher grade stuff.
  • Dex
    edited July 2014
    Junkster,
    I was looking at the yields
    NHMAX 5.88% - I got some when Fidelity wasn't charging a front end load
    HYD is pretty good at 5.53%
    EIHYX at 5.13%
    HYMB at 4.69%
    Believe me, I'm with you on the high yield muni train.
    I'm thinking this has between 6 - 18 months to run. Everyone is talking about higher rates and inflation. I see inflation personally in many of the things I buy but I don't think salaries/pay is rising so it will remain tame as will the FED.
    We all may be surprised how long this low yields last.
  • catch22catch22
    edited July 2014
    @Dex
    ??? NHMAX
    Fido is not in charge of whether a fund from another vendor is frontloaded; as these "A" shares from Nuveen.
    This fund in particular is "load wavied".

    Fido info



  • Dex
    @catch22
    NHMAX
    I don't know what happened. I bought it at Fidelity without the load.

    I just checked and the site is saying: "Load (Load waived at Fidelity) 4.20%"

    I even checked at Vanguard at the same time - the load was in effect.

  • catch22catch22
    @Dex
    This change may have been very recent. I don't know, as I had not checked this fund at Fido, previous.
    Take care,
    Catch
  • AndyJ
    edited July 2014
    In the past year-plus, Fidelity has waived loads on lots of A shares. Other brokerages apparently do this also - it's a matter of negotiation between the supermarket and fund management. Load-waived shares are designated with the suffix .lw added onto the end of the ticker. They still cost more than typical I shares, but don't require a big minimum buy.

    That Eaton Vance fund looks interesting ... kind of HY light, with ~ 70% investment grade, 15% non-investment grade, and 15% unrated, with pretty low turnover at 30%. Its A shares are also lw & ntf at Fidelity.
  • MOZART325
    This is a good link to monitor the spread of high yield bonds. Currently the spread is 375 basis points, up from 330 basis points just a few months ago. But the Treasury yields have dropped, so the high yield prices have barely dropped in that time period.

    http://research.stlouisfed.org/fred2/series/BAMLH0A2HYB
  • AndyJ
    MOZART325 said:

    This is a good link to monitor the spread of high yield bonds. Currently the spread is 375 basis points, up from 330 basis points just a few months ago.

    I didn't know about that specific spread calculation you linked, Mozart, but here's another one from FRED, based on the 'BAML US HY Master II'.

    I've followed the Master II calculation of the spread for a while, and 3.80, which as of Monday was the widest spread during this recent uptick in rates, has been a significant level all year: first as a floor, then as a ceiling, and now once again a ceiling, for a couple of days at least. Setting the time period on the chart to 1y is the best way to see the relationship.
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