High Yield Spreads Near Long Term Average

During the depths of the financial crisis last year, high yield spreads widened to near record levels. Spreads in early 2009 approached nearly 2000 basis points. Since that time spreads have narrowed to near their long term average just below 600 basis points.

One question many high yield investors are asking is whether the strong returns in this fixed income segment are behind us. Certainly, the 58% return achieved in the Merrill Lynch High Yield Master II Index in 2009 is not likely to be repeated in 2010. However, as the below chart shows, the spread tends to continue tightening beyond the long term average as the economy improves. Given the low interest rate environment for cash and investment grade debt, investors may continue to chase high yield resulting in further spread tightening.
High Yield Spread 12 2009

Source: Fidelity Investments