High yield credit spreads are on the rise. Is this a trend or a blip? The current high yield index is still low when compared to the 15 year average of just under 10%. However, when looking at the 10 year decline in US bond yields over that same period, along with the recent uptick in high yield spreads, one has to wonder, what is going on?
With the prospect of ever declining treasury yields, and with negative interest rates a real possibility as shown in the chart below, it may be that investors will start to ask for increased credit risk spreads. This implies a decoupling of high yield rates with the lower reducing interest rates on offer from central banks.
While there are technical reasons for an investor to hold negative yielding investments over short periods, as a trade, a long term investor would choose to hold cash at 0% interest instead of incurring a cost to invest, or to make a riskier investment for an increased return. That this risk premium seems to be rising is interesting. At some point when the return is so low, it may not be worth the hassle of holding something risky for a small incremental return (compared to) earning no return at all.