High yield bonds - spreads move to average but tailwinds increasing

High yield investing has not been good to investors especially in the third quarter. The combination of a second price decline in oil prices, continued price declines in metals, a slowdown in emerging market growth, and a potential increase in rates has all worked to provide a tailwind for higher spreads. This does to mean that there are no opportunities in high yield; however, there are forces for making careful selection more important. 

Return differences between Treasuries and high yield have widened significantly. Spreads are close to three year highs as measured by the BAML OAS index. However, we can easily see spreads move 200 bps higher based on the shock in the middle of 2011. That period was one of market confusion about monetary policy and what looked like a slowdown in growth. While the facts were different, we may be facing a similar confusion growth scenario. A positive would be the fact that spreads are well off their lows and higher than the pre-crisis level. That may feel good for some investors, but spreads are always compensation for risk and the current risk levels may be higher than the mid-2000's. 

The big gains from high yield in the post-crisis period may be behind us, so looking at other forms of risk premium or more active credit trading is appropriate.