On Sept. 16, the option-adjusted spread on the BAML High Yield Index, 527 bps, stood at -234 bps versus our Fair Value estimate of 761 bps. The Aug. 31 divergence of –251 bps (based on an actual OAS of 510 bps) represented the biggest month-end overvaluation since May 2008’s –321 bps.
On Sept. 8 the spread dipped to 499 bps for a gap of –262 bps, more than a two-standard-deviation disparity (one standard deviation = 126.3 bps). A divergence of just one standard deviation qualifies as extreme overvaluation in our analysis.
By way of background, our basis for determining whether the U.S. high-yield market is fairly valued is the methodology introduced in “Determining fair value for the high-yield market.” (This report is available at highyieldbond.com.) We are now using an updated analysis to reflect revisions to originally reported economic data, based on a historical observation period of December 1996 to December 2012.
This story, part of a longer piece of high yield analysis by Marty, first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.