For High-Yield Bonds, It’s Still All About Oil

Oil and high-yield bond prices remain tightly linked. A close relationship between the two has persisted since summer 2014, when the price of oil began to decline from over $100 per barrel, and the linkage remains as strong as ever (per the figure below). In fact, for the five trading days ending April 27, 2016, the correlation between the average yield advantage of high-yield bonds (or spread) to Treasuries and the price of oil has been -0.96, a near perfect inverse correlation.

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Higher oil prices reduce default risk for energy issuers, which comprise a significant 13% of the Barclays High Yield Index, and also lower spillover risk to the broader economy. Oil’s impact on the economy is also reflected in a close, but inconsistent, relationship to Treasury yields (see figure). Resurgent oil prices help explain a seven-day losing streak for Treasuries (April 18–26, 2016), and the correlation has been relatively high (0.67) since the start of 2016 through April 26.

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It would be comforting to say that the impressive 10%+ rebound in high-yield bonds from February 11, 2016 through April 26, 2016 was due to a refocus on broad market fundamentals, but the tight correlation says otherwise. It’s still very much all about oil. This is less true for the broad bond market, but oil prices continue to have a heavy influence in 2016.

IMPORTANT DISCLOSURES
Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

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The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, noninvestment-grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt.

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