This post was written by Christian Brobst, Calamos Vice President, Portfolio Specialist.
The predominant opinion in the realm of high yield is that spreads have nowhere to go but up.
With an option-adjusted spread of 378 basis points as of the market close on August 15, the Bloomberg Barclays U.S. High Yield Index has certainly seen a significant drop from levels of over 700 basis points in early 2016. If historical relationships provide any insight, spread levels in the context they are in today do not necessarily spell imminent trouble for the high yield market. We see no signs of recession, and defaults continue to run at historically low levels.
Since Bloomberg Barclays started tracking the option-adjusted spread of its benchmark in 1994, the market has gone through two extended periods where spreads stayed below 400 basis points, as measured by monthly closes.
From both January 1994–July 1998 (55 months) and again from June 2004–June 2007 (37 months) spreads did not close above 400 at any month end. By contrast, spreads have been sub-400 only since January 2017 (seven months). The yield to worst of the index was 5.73% as of August 15, 2017.
If spreads were to trade range-bound over a more extended period of time, investors would be giving up a core source of income by exiting strategic high yield allocations now based on concerns of spread widening.
Calamos believes in a disciplined, diversified approach within the fixed income allocation, with high yield representing a component of that allocation. Advisors, for more information, please talk to your Calamos Investment Consultant at 888-571-2567 or [email protected].