Back on January 19 I noted that High Yield bonds were a rather poor investment historically: on average they generated returns like Treasury bonds, but with twice the risk. I also noted that at that time the spread to Treasuries was below expected loss rates, meaning that a buy-and-hold investor should expect to make a lower return than Treasuries because the expected loss rate (default rate x loss in event of default) was greater than the extra spread.

The graph shows what happened subsequently: the spread wandered a little bit, then jumped smartly around the middle of March. In my opinion this merely takes corporate bonds from being a good short/bad buy, to being a bad buy and a bad short.



Of course, economists are very adept at noting what stocks were good to buy last year, and I'm no exception, but there's more to this story than hindsight. BlogPulse measures the frequency that certain word combinations are in the blog universe, and there is a high correlation between the blog mentions of “hedge funds” and the Corporate spread (see graph above or hit link here). Most of these blog mentions are in the context of discussions of potential disasters, positive feedback loops, and other financial debacles. This is evidence that hedge funds are generally long credit risk, as hedge funds begin to feel pain when spreads rise, especially when the stock market (the hedge) does not plummet in concert.