We gave some statistics last week in our post about how the high yield bond market has historically performed very well when spreads reach 900bps (The Quarter in Review). According to J.P. Morgan, their High Yield Index peaked on Tuesday at 896bps and many of the other high yield indexes surpassed the 900bp level on that day. Again, as we noted last week, after spreads have reached 900bps in the past, they have historically posted average annual returns on a one, two, and three year basis of 17.9%, 16.8%, and 15.7%, respectively. And J.P. Morgan added, “Notably, if you had invested in high-yield bonds in September 2008 when spreads reached 900bps, you would have endured spreads widening to a record high 1900bp during the next 6 months and still managed to record a 1 year return of +20.4%.”1 So while there may be some volatility, which is unavoidable given the factors the generally send spreads spiking, this historical data seems to indicate that in the medium and long-term, the returns are ample—well above historical averages.
There is value to be had in this market of what we see as bargain pricing given the credit quality of the issuers. Capital gain opportunities are once again prevalent and we are taking full advantage of them. So at current spread levels we feel that we are poised well for the long-term as we take advantage of a rare spread opportunity in the high yield space.
1 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Alisa Meyers, and Rahul Sharma. “Credit Strategy Weekly Update: High Yield and Leveraged Loan Research.” J.P. Morgan North American High Yield and Leveraged Loan Research, October 7, 2011, p.1.
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