Narrower High-Yield Gap Buttresses U.S. Stocks: Chart of the Day
By David Wilson
Oct. 28 (Bloomberg) – High-yield bonds have rebounded far enough in the past two weeks to suggest U.S. stocks are headed higher, according to Thomas J. Lee, co-founder and managing partner of Fundstrat Global Advisors LLC.
As the CHART OF THE DAY shows, the yield gap between the Bloomberg USD High-Yield Corporate Bond Index and comparable Treasury securities shrank by more than 60 basis points from Oct. 15 through yesterday. Each basis point equals 0.01 percentage point.
"We see this as a likely signal of further gains in equities,” Lee wrote in an Oct. 24 report. Stocks typically move higher after the yield gap narrows by 50 basis points or more, the New York-based strategist wrote.
The latest narrowing coincided with a 5.3 percent advance in the Standard & Poor’s 500 Index, depicted in the chart. The index rebounded from this year’s biggest decline, 7.4 percent, which was recorded between Sept. 18 and Oct. 15. The yield differential is inverted for easier comparison.
In the past three months, the spread has swung more than the S&P 500, as the chart shows. Lee wrote that volatility in high-yield bonds “may have been exaggerated” because energy producers account for a growing percentage of the securities.
Energy’s weighting among 10 industry groups in the Bloomberg index rose to second this year from fourth in 2010, according to data cited in the report. The dollar value of the group’s non-investment-grade debt increased 223 percent in four years, beating a 154 percent growth rate for the entire index.