Investors in equities will often look to the high yield credit markets for signs of confirmation or divergence from the prevailing trend in equities. Typically, spreads (yield on junk bonds relative to treasuries) move in the opposite direction as equities, so when the equity market is rallying, spreads decline (investors perceive less risk in holding lower quality debt). Conversely, when equities fall, spreads rise (investors perceive more risk in holding lower quality debt).
With the S&P 500 currently trading at its highs for the year, one would expect high yield spreads to be trading near their lows of the year. As shown in the chart below, over the last two days that is exactly what has happened. Spreads on the Merrill Lynch High Yield Master Index have fallen to new lows for the year, and they are currently at their lowest levels since 8/1/11.
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