Mind The Gap: U.S. Equities, High Yield Bond Spreads
Jeroen Blokland | Nov 25, 2019 10:24
An interesting divergence between US equities and high yield bond spreads has opened up recently. While the S&P 500 Index continues to rise, high yield bond spreads have widened. Usually, however, the two are very closely correlated. So are equities ahead of themselves? Not necessarily.
First, there could be idiosyncratic factors at work. For example, the US high yield universe includes a significant amount of US shale oil producers, which remains a fragile business. Spread of US energy-related high yield bonds have increased to 826 basis points, the most since 2016 when oil prices fell to USD 25. In addition, high yield bonds look expensive from an absolute and relative level, and the current development could be part of a revaluation of the asset class. This doesn’t take away the fact that we have become a bit less outspoken regarding the overweight in equities as both economic and political worries have increased in the last couple of weeks.
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