There have been recent headlines about yields in the high-yield market hitting all-time lows. Yes, this is true, but let’s put this in some context. First, interest rates have been at or near all-time lows for years, pressuring yields in all fixed income securities as investors search for places to generate returns. Comparatively, we believe the high yield market still looks very attractive.1
Second, yields are merely one metric to look at as you evaluate “value” in the high yield market. We believe, especially in this low-yield environment, that spreads (or the difference in yield between the yield-to-worst on the high yield market and comparable maturity Treasuries) is a better way to monitor levels in the high yield market. So, let’s take a look at historical spreads:2
One thing to note in looking at the chart above is that there are several spikes in spreads that upwardly skew the average numbers. If you look at the data and remove these “systemic shocks” (the periods from 9/30/89 -12/31/91, 5/31/2000-6/30/03, and 6/30/08-11/30/09), the average spread to worst goes from 585bps to 487bps, and the median spread moves from 521bps to 468bps. It’s also important to realize that nearly two-thirds of the time over the entire 28 year plus period spreads have been under the 600bp level. The all-time lows on spreads was 271bps, set in 2007, and we have also spent a good chunk of time at spreads sub-400bps over history.3 So as we sit today at spreads of right around 400 bps, we are certainly far off all-time lows here. It should also be noted that the spreads between investment grade and high yield bonds stands at 312bps, also well off the all-time low of 176bps.4