High Yield Bonds

High-yield bonds have acted a lot like stocks over the past two years, but unlike stocks, bonds eventually have a pull-to-parity. So how much more can high-yield bonds run?

Credit Suisse's fixed income research team highlight that the average yield on the Credit Suisse High-Yield Index is a record low 6.89% (since at least '86). The average high yield bond is now trading at nearly 104 compared with an average dollar price of about 56 in December 2008. They calculated a theoretical lower bound for yields by adding the treasury yield and the historical average default loss rate. At this lower bound, investors leave no cushion for any liquidity or credit risk premium. The overall average default loss rate has been fairly stable over time, ranging from 1.91% to 3.11%, and the premia have historically averaged 322 basis points. With the 5-year treasury yield at 2.4% and the long-term high yield default loss rate at 2.73%, 5.13% is roughly the current floor for yields.

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