U.S. High-Yield Bond Spreads Narrow
The latest U.S. high-yield bond reading showed investors demanding a little less extra yield to own lower-rated corporate debt. The ICE BofA spread published through the St. Louis Fed fell to 3.20 percentage points on Thursday from 3.30 the previous day. That spread measures the extra yield investors demand over comparable Treasury debt, with an adjustment for features such as a company’s ability to repay a bond early. The reading came from Thursday’s market, so it offers a credit check going into Friday afternoon.
The distinction matters because borrowers pay a rate that reflects both the Treasury benchmark and the premium investors demand. On Friday, the Associated Press reported that the 10-year Treasury yield rose to 5.14% from 5.10% late Thursday. Those figures and the spread cover different windows, but they show why we’d check the actual terms of a new bond issue before concluding that refinancing has gotten cheaper. If companies can refinance at a manageable cost, they have a better chance of keeping up with their interest payments. Companies replacing debt issued when rates were much lower can still end up paying more.
For high-yield bond funds in the Fly High universe, a narrower spread can help the market value of bonds they already own, all else equal. The coupon on a fixed-rate bond stays the same, though, so the fund still collects the interest the borrower agreed to pay. And when bonds mature or are called early, the manager has to find a home for that cash. If comparable replacement bonds offer less yield and the fund’s borrowing costs stay high, there may be less income left after expenses to support the distribution.
We take the narrower spread as a modestly favorable sign for market access. For the distribution, we’d put more weight on the income a fund actually keeps after financing and other expenses. If the next reports show that figure holding up as managers replace maturing bonds, we’ll have a stronger reason to believe the current payouts are supported by recurring income.
Sources
- ICE BofA U.S. high-yield spread via FRED
- Associated Press Friday market report
- High-yield fund annual financial report on EDGAR
This article is general information, not personalized investment advice. Fly High Investing may hold securities discussed in this article.