High-yield spreads heading south
Source: http://www.investmentpostcards.com/2009/06/10/high-yield-spreads-heading-south/Posted on Wednesday, June 10th, 2009 | In Bonds, Market Commentary
The spread on junk bonds has been declining consistently over the past few months and has now reached the lowest level since September last year. High-yield spreads, as shown by the Merrill Lynch US High Yield Index, have dropped by 51.5% to 1,059 from a record high of 2,182 on December 15. This means the spread between high-yield debt and comparable US Treasuries was 1,059 basis points by the close of business on Friday. This level is still 155 basis points above the pre-Lehman bankruptcy levels.
Source: Merrill Lynch Global Index System
Another indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds. Again, the Index is back at September levels.
With the US 10-year Treasury Note yield at 3.88%, high-yield borrowers still have to pay 14.47% per year to borrow money for a 10-year period. At these rates it remains almost impossible for companies with a less-than-perfect credit status to conduct business profitably.
Although high-yield spreads have narrowed considerably and the credit convalescence process seems to be on track, they still has a way to go before reaching pre-crisis levels and investor confidence returning to more “normal” levels.
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 About Prieur du Plessis (http://www.investmentpostcards.com)
Prieur du Plessis has 25 years’ experience in professional investment research and portfolio management. More than 1,000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He has also published a book, Financial Basics: Investment. Prieur is chief executive and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and other African countries. Plexus is the South African partner of John Mauldin, author of the Thoughts from the Frontline e-letter, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental IndexTM methodology in the Pan-African area. Prieur is 52 years old and lives with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His recreational activities include long-distance running, motor cycling, traveling and reading. |
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