However, if an investment is viewed as higher risk, investors demand adequate compensation through a
higher yield spread in exchange for taking on the risk of their principal declining.
Similarly,
yield spreads on high yield bonds of 8.1 % are also well above their historical averages of 5.6 %.
In an environment
when yield spreads are tight and volatility is low, investors may want to consider reducing risk.
It is not coincidence that corporate
bond yield spreads are the highest when defaults are the highest!
This resulted in lower relative interest rates (
tighter yield spreads) for Canadian issuers than would otherwise be the case.
The chart below shows the direction of high
yield spreads since 1997 with spikes of 20 % or more highlighted in red.
Although current
Canadian yield spreads are not exceptionally expensive, given the global credit boom, they are not cheap.
The question is whether the
narrowing yield spread is still a reliable late - cycle warning that the macro profile will weaken in the months ahead?
I suspect that consumers don't actually care
about yield spread premiums any more than they care about the lender's electric bill.
The Rule of 20 valuation analysis provides the fundamental risk / reward equation while the 120
Yield Spread adds the momentum input from the economic and monetary trends.
If Canadian
dollar yield spreads on similarly rated credits are higher for foreign issuers than their Canadian peers, Canadian managers will buy these issues.
Any risk - based capital system that uses short - term price, yield, or
yield spread movements, will make the management of portfolios less stable.
Yield spreads lag behind option volatility even though the two should be closely related.
The new proposal would effectively
eliminate yield spread premiums, thus preventing borrowers from being guided toward risky loans that would potentially increase commissions.
But now for the bad news: the trade won't be over until high
yield spreads start blowing out, and presently, they show no sign of doing that.
Since 2000, monthly changes in
high yield spreads have explained roughly 10 - 15 % of small cap's relative performance.
I have a rule for avoiding small
bond yield spreads; they are too narrow to waste time over, and the present distress illustrates why.
When compared to the historical trend,
yield spreads between Treasuries of different maturities may indicate how investors are viewing economic conditions.
They were the worst of BBB - rated bonds, but they argued off of a limited period of past returns, that the widening in
yield spreads over Treasuries was not justified, so but them because they survive and outperform.
Although, this may seem quite reasonable as service charges, you should check whether your broker is earning some back - end points, also called
Yield Spread Premium.
UBS analysts pinpointed a key abnormality in last week's correction: «a U.S. equity decline of 7.4 %, as seen over the last five working days, has historically been associated with a high
yield spread widening of 75 — 80 basis points... The actual move has only been 21 basis points.»
But TIPS prices suggest that most of the increase in
yield spreads of late has come from investors pricing in higher inflation expectations.
Borrowers whose fees were offset
by yield spread premiums (commissions paid to brokers by wholesale lenders) only got about $ 200 in savings for every $ 1,000 in YSP paid to their brokers.
As an aside, a break by the 10yr - 2
yr yield spread above its September high would also be a recession warning and a bearish omen for the stock market.
Origination fees shrunk to an average of 1 % or less, and since borrowers in 2016 come armed with much more information about going rates compared to borrowers in 2006, the days of making easy money
from yield spread premium are over.
To the extent credit markets take the events in Washington in stride — even during the worst selling last week high
yield spreads remained comfortably below 400 basis points (4 %)-- equity investors can breathe a little easier, at least until they can't.
The
historical yield spread of the two indices widened from 1.72 % to 2.32 % over the past three years (see Exhibit 2).
This is particularly true when policymakers like the Fed are triumphant over high valuations, and
low yield spreads.
As a result, when people in the media, or writing blogs those argue that high yield is cheap
because yield spreads are wide, it is time to disregard then when Treasury yields are artificially low, because of government interference.
Equity Volatility and
Credit Yield Spreads by Ziemowit Bednarek of the University of California, Berkeley (400K PDF)-- 45 pages — November 9, 2006
Japan may also prove interesting, as banks were relatively untouched by the financial crisis, and there's an attractive property vs.
debt yield spread.
The transaction must feature either 1) a funder
provided yield spread premium or 2) sufficient third party capital contribution to VA Home Loan Centers equal to twice the rebate amount.
Phrases with «yield spreads»