A whiff of hope that a shutdown would be averted led markets to strongly come back last week. The Dow was up 300 points and credit followed obediently, but muted in comparison (see spreads below).
Meanwhile even after the run-up in credit, the spread of high yield to treasuries (also known to mortgage observers more precisely as the OAS – option adjusted spread) is now at a recent low (+460 bps). Just as an observation, the super-low was close to 250 bps just after mid-2007; and investment-grade spreads (over swaps) went as low as +28 bps back then! Treasuries were higher-yielding back then, and total yields were of course, higher. But while that may be true, spread is spread and reflects relative luster between assets. I guess then, to make a long-winded point, market participants see this current spread wide-enough to justify backing up the trucks (funds and ETFs) periodically – when they have fresh cash – explaining much of the inflow and strength in the high yield market. And this reiterates another conviction as well: that while inflation remains tame and GDP growth sluggish, high yield is as good a place to park your money as riskier assets like stocks.
Investment grade +77 bps over swaps (-4 bps better week over week)
High yield – 5.9% yield to worst (-10 bps better week over week)