High Yield Spreads And Breakeven Inflation Moving In Lockstep

The high yield spread over 10-year treasury has synced up to changes in breakeven inflation. These two series have had a strong negative correlation to one another since 2003 (when our data starts). The correlation between these two series has been -76%. However, over the past three years, the relationship has become even tighter with a correlation of -92%. So it seems that the inflation trade is one and the same right now as the high yield trade. 10-year breakeven inflation is currently at 192 bps, which is the highest level since April 2015. The one quarter change of 41 bps in breakeven inflation is the largest one quarter change since September 2012. The current one year change of 36 bps is the largest one year change since February 2013. If investors believe breakeven inflation will continue trending higher than it is probably safe to assume that high yield spreads will continue to narrow.

High Yield Spreads

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High Yield Spreads

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Article by Eric Bush, CFA – Gavekal Capital Blog