The Year in Review for High Yield

With the conclusion of 2009, I thought it instructive to show how massively credit spreads have collapsed since peaking in December 2008. The spread to worst on the Credit Suisse High Yield index has declined to 647 bps from a staggering 1900 bps on December 18, 2009. Similarly, the yield to worst on the index has declined to 8.8% from over 21% in late 2008.

The compression in spreads led to an approximate 57% increase in the broader high yield index with CCC’s (the real dregs in high yield land) returning over 100%. For distressed bonds that traded at 10-15 cents at the market nadir, many have risen by a staggering 500-600%. Needless to say, it has been an unbelievable year in credit.

As demonstrated in the charts below, yields have returned to late-2007 levels (around the time of the equity market peak in October 2007) and spreads have compressed to levels last seen in June 2008 (right before the market really started to blow out in July 2008). While history suggests that we could see some further spread tightening, particularly if the economy continues to heal, high yield credit will be a much more difficult place to earn a living in 2010. In my opinion, for those with a more bullish orientation, the equity markets offer a much more compelling risk reward proposition. This will be even more the case if inflation begins to surface.