In the blog post last week, we mentioned an apparent lack of confirmation of the new high in the S&P 500 compared to other parts of the equity markets. We briefly mentioned a similar development in the high yield credit market. High yield credit has not made a new high versus Treasuries, which peaked on October 3, 2018.
Last week, we looked at the same time periods when the S&P 500 made new highs (9/19/14 and 1/26/18) to see how high yield performed. In both instances, high yield was in a strong uptrend versus Treasuries in addition to making a new high.
We also looked at how various parts of high yield (BB, B, and CCC) are now performing against BBB-rated credits and how none of these high yield credit rating tiers are at new highs versus BBB-rated credits. In each of the two noted prior periods, all of the high yield credit tiers were in uptrends versus BBBs and made new highs. However, they were not always at new highs by the end of the measurement period.
In addition, we looked at how different credit ratings within high yield were performing. A similar pattern emerges which shows none of the lower high yield ratings (B and CCC vs. BB and CCC vs. B) at new highs. In the two noted prior periods, there was a similar trend to the performance of high yield compared to BBB. Each of the lower-rated credits were in uptrends and made new highs but were not always at a new high by the end of the period. The most concerning observation was the lack of relative performance from CCC-rated credits. These credits tend to have the most default risk and can serve as a proxy for risk sentiment. Throughout the prior periods, they were performing well when the S&P 500 was making new highs. Currently, they are well-below their prior relative highs versus BBB, BB, and B-rated credits, and even below their relative highs for the 2019 calendar year.
This relative performance divergence and lack of confirmation occurs at a time when relative spread valuations of high yield are all below their long-term mean levels versus BBB-rated credits and within high yield credit tiers. The weakened valuation and technical back drop for high yield means there may be better times coming to increase high yield exposure.
Rank Dawson, CFA
Vice President, Strategic Planning
Boyd Watterson Asset Management, LLC
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.