In this week's chart, we are going to look at high-yield fund flows versus the high-yield credit spread.
First, we need to understand what the high-yield credit spread is, which is just the extra yield you get in high-yield bonds above that of comparable U.S. Treasuries. So, if the U.S. Treasury is at 2% and the high-yield is at 6%, the credit spread will be 6% minus 2%, which is 4%.
Now, let's look at the chart. Historically, we've seen a relationship between rising credit spreads and outflows in high-yield bonds. In 2011, when credit spreads rose dramatically, we saw outflows in high-yield. And then again in 2012, and even again in 2013 with a small uptick in spreads, we saw a massive outflow in high-yield bonds. Then, moving on to 2014, we've had four consecutive months of outflows with September being a negative $7 billion outflow.
The recent outflows are due to concerns about U.S. earnings, geopolitical tensions, and a potential slowdown in Europe and China. If you are an investor looking to invest in high yield today, now may not be the best time, because while credit spreads are rising, they are still well below long-term averages. So, you may want to wait until some point in the future to invest.