High-yield bonds confirm market's risk appetite

High-yield bonds, the riskiest corner of the corporate credit market, showed notable strength last week, with more than 20% reaching 52-week highs, the most significant proportion in nearly a year. 

Although the sample size is tiny due to limited data, when one-fifth of high-yield bonds hit a 52-week high, the S&P 500 tended to perform well over the following twelve months, rallying 100% of the time.

The ICE Bank of America CCC and lower high-yield bond index tracks the riskiest junk bonds, which are highly sensitive to the economy. With this group moving in line with the S&P 500 based on their one-year range rank, bond investors see little evidence of an imminent recession. 

In contrast, when the S&P 500 peaked in October 2007, the ICE BofA CCC and Lower High-Yield Bond Index failed to confirm the move, signaling that credit investors were uneasy about economic conditions and their implications for lower-rated bonds.