High Yield Credit Spreads Out of Control

If you're a company with less than perfect credit looking to borrow money, hopefully you have made other plans.  As shown below, based on data from Merrill Lynch, high yield spreads keep rising and have shown no signs of letting up.  As of Wednesday's close, the spread between high yield debt and comparable Treasuries is 2,039 basis points.  As shown in the chart below, spreads are well into record territory and the rate of increase has turned parabolic.  Additionally, since bottoming in June 2007, high yield spreads have increased by nearly 750%.

With the 10-Year Treasury currently yielding about 2.65%, high-yield borrowers currently have to pay nearly 23% per year to borrow money for a ten-year period.  It's going to take pretty high margins to maintain profitability in this kind of environment.

 

Comments

[Ted Murphy]

What is the source of this data? Who are the individual credits? Can we invest in the underlying bonds?

We have been hearing recently about opportunities in corporate bonds from Carl Icahn, Bill Gross, et al.

[Nurseb911]

That's completely nuts! I can understand the relationship between risk & reward varying under extreme situations, but some of this corporate debt remains very high quality in companies with little or no exposure to the credit markets or financials.I think there are people who are going to make a ton of money off these if they have a long-term investing horizon.

[Tom Chechatka]

Incredibly instructional data points. Thanks for sharing.