HY and Spreads
Last year, I highlighted the drop in yields on treasuries and corporate high yield bonds. Now that rates have rebounded, those relationships have changed. U.S. Treasury yields have risen dramatically this year from 1.52% in December to 2.82% this month.
The Fed began raising the Fed Funds rate and stopped its bond buying program in hopes of easing inflation. However, the Fed's determination to ease inflation is increasing the odds of a recession. As a result, not only are rates rising but credit quality concerns are increasing too, widening the high yield spread over treasuries.
Post COVID-19, yields on treasuries and high yield bonds, as well as their spread, reached record lows, providing sub-par prospective returns. Now however, the moves in 2022 have brought these yields and spread to near long-term averages. Today's 10-year treasury yield of 2.82% is just under the 20 year average of 2.93%. The yield on the High Yield Index is at 8.84%, above the average of 7.78%. The high yield spread of 5.99% also is above the long-term average of 5.40%.
While bonds may now appear to provide adequate yields, especially compared with the post COVID period, inflation remains high. Plus, should a recession occur, further losses in high yield bond prices may push yields and spreads even higher. More to ponder this summer.