The high-yield market may not be sending the freak-out signal the stock market thought it was just two days ago.
Brad Rogoff, Barclays head of credit strategy, screened the performance of the bonds in the Bloomberg Barclays High Yield Index high yield index that are publicly traded against the equities of those companies. “They’re performing in line with their historical relationship with each other,” he said.
The recent selloff in high yield, which subsided Thursday, spooked some in the stock market, who were concerned it was a harbinger of trouble ahead. The biggest declines were in telecom and health care.
“If you look at the Q3 earnings season, there’s been a significant amount of volatility around earnings, and dispersion among companies has picked up with earnings volatility in a number of sectors,” he said.
Traders have said the failure of Sprint to strike a deal with T-Mobile and the Justice Department objections to the AT&T and Time Warner merger affected telecom debt, but there ‘s also been selling in some retailers and health care names.
“If you look at high yield performance, you have to put it in the context of where we were —basically at the post-crisis tights, and now we backed off and traded off a couple of points,” Rogoff said. “The equities market and the credit market aren’t giving you any different signals.”
He said the high yield market does not benefit from the type of outperformance as the stock market from the large cap tech names, but it has tracked the stock market performance of the high yield names that trade there, based on his review.
Rogoff said some of the weakness was a result of concerns about the Congressional tax plans which would limit the deductability of debt, which could be a problem for some of the more heavily indebted names. Rogoff said the House bill, which would not impact as many as the Senate plan would.