The ICE BofA High Yield Index stood at 9.5% at week’s end (measured daily), whereas CPI (a monthly measure) stood at 8.2% as of September. Therefore, investors enjoy 130 basis points (the delta between the High Yield Index and the CPI) of positive real yield. The fact that positive real yield exists in the High Yield market should pull capital out of Equities into High Yield credits.
We expect that High Yield credits will see yields climb in the coming months due to tightening monetary policy and increased macroeconomic and geopolitical risks. Issuer-specific cash flows is what matters when evaluating a High Yield credit. Those cash flows have more risk today than 6 months ago and are likely to carry more risk 3, 6, 9 and 12 months forward as compared to today.
It is unclear if headline CPI has peaked given that the winter months are coming which means Energy costs are likely to climb higher. That said, we expect the yield on High Yield credits to outpace potential CPI increases.