A previous post suggested a more promising outlook for corporate high-yield bonds, based on an easing of credit conditions reported in the latest UK loan officer survey and the likelihood of a similar improvement in the next US survey, due for release in early May.
Another hopeful sign for credit conditions and high-yield bonds is a recent fall in the borrowing requirement of US non-financial corporations, defined here as their “financing gap” – capital spending minus domestic retained profits – plus share purchases net of issuance. As the chart shows, this measure leads the yield spread of high-yield bonds over Treasuries.
The borrowing requirement has fallen steeply from 9.5% of GDP in the fourth quarter of 2007 to 3.6% by last year’s fourth quarter. A further decline is likely, since companies’ net share-buying was still running at 3.2% of GDP in the fourth quarter but should slow in 2009.
A sharp fall in the borrowing requirement preceded a narrowing of high-yield spreads by two years in both the late 1980s and early 2000s. Assuming a similar lag in the current cycle, high-yield spreads could decline significantly from late 2009.
