Reaching for yield: HY spreads positively correlated to treasury yields

By Sober Look On Oct 3, 2013

Here is further evidence that in this environment treasuries are driving “risk asset” valuations. Corporate HY bond spreads are now positively correlated to treasury yields. That’s quite unusual because traditionally when treasury yields shrink, spreads rise (negative correlation).

Based on Merrill HY Index

By not allowing treasury yields to rise, the Fed is artificially suppressing HY spreads (as well as other “risky” bond spreads). The corporate market is therefore heavily dependent on stimulus, making any attempt to normalize monetary policy increasingly difficult.

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Sober Look is a no-hype financial markets/macro blog that typically relies on data analysis, primary sources, and original materials. We keep it concise, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include financial markets, banking, asset management, risk management, derivatives, global economy, policy, and regulation, with the emphasis on finance education. Follow him on his blog or twitter.

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