High-Yield Spreads and Time Walk Hand in Hand
One of the most common metrics evaluated in the high-yield bond market is "spread." Spread is the difference in yield between a highyield bond and a risk free U.S. Treasury bond of a comparable maturity/duration. Simply stated, the spread is the extra compensation an investor requires to bear the additional risk of an asset relative to the risk-free asset. Numerous research papers have demonstrated the benefits of investing in high-yield bonds when spreads are wide of their historical average. We agree that owning high-yield bonds when spreads are "wide" typically creates an attractive entry point into the asset class. However, as counterintuitive as it may seem, owning high-yield bonds when spreads are "tight" to the historical norm has also created attractive entry points into the high-yield asset class. The primary reason is that spread alone is not the only factor to consider. Investors need to consider that spread and time walk hand in hand, and using spread as a way to time an investment in high yield may miss the mark.

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Posted on Wednesday, November 1, 2017 @ 1:46 PM

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.