Bubble or not, the rally in high yield spreads has remained in place to start 2013. Ā Following yesterday's rally, spreads on high yield bonds relative to US Treasuries fell to 516 basis points (bps), or the lowest levels since June 2011. Ā Even after the recent drop, high yield spreads are still well above their bull market low of 453 bps from March 2011. Ā That being said, we would note that back in April 2011, long term Treasury rates were more than 150 bps higher than they are now, so strictly on a yield basis, high yield bonds are lower than ever.
The chart below provides a theoretical yield in 10-year high yield bonds. Ā To calculate this yield we added the spread on the Merrill Lynch High Yield Master Index to the yield on the 10-year US Treasury. Ā As shown in the chart, the theoretical yield on 10-year high yield debt fell below 7% in late 2012 for the first time ever. Ā Just like we have seen in the Treasury market in recent months, never before have investors been willing to lend money for less of a return than they are now.
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