Everything is most assuredly not fixed in HY energy just because oil prices are no longer scraping the bottom of the barrel (pun fully intended).
The last time HY spreads and yields were where they are today, oil prices were between $80-$90/bbl, not $52-$55.
As Jeff Gundlach put it earlier this week, the spread cushion in HY credit has all but evaporated.
Well, for Friday’s chart check, I thought I’d give you one more visual that speaks to just how overdone the HY rally is.
Distressed opportunities decline but high-quality too rich. After very strong performance in the distressed market in 2016—with bonds over 1000bps in spread returning 57%—the share of bonds still trading at distressed levels has materially declined. Using the bond constituents of the iBoxx HY index, a meager 6.6% now yields above 10%—down from a quarter of the market on February 11 (Exhibit 4). Over the same period, the tight-end of the yield distribution has significantly thickened with the portion of bonds below the 4% yield threshold growing from just 3.4% to 23.1% currently.