High Yield Spreads

Risky business

We’ve seen a lot of indicators for stress, such as bond yield spreads and the VIX:

There is another popular and useful metric for stress which takes a look at a different side of bond yields by using high yield (or non-investment grade) constituents instead of investment grade constituents. With this metric, the spread between poorly rated (i.e. riskier) bonds is compared to treasuries (i.e. less risky stuff). When things get stressful, people demand more yield for risky things, so the spread between these two things gets bigger. Here’s what that looks like:

This should look familiar to the other two charts. It’s yet another helpful way to assess the presence or absence of stress in the market. In March, things were stressful. But now, things are looking pretty good. And, that’s good for things overall - less stress is always a welcome development in my book!

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