Yield on high yield debt rose in the month of May the most since February 2009 while Investment Grade debt was little changed. High Yield is now back above 10% which accounts for a spread of approximately 7% versus medium term treasuries. However, attractive yield spreads aside high yield will perform along with the economy and its inherent risks.
One of the potential trends we have our eyes on is a serious rise in long term treasury yields. In an interview with St. Louis Federal Reserve head Bill Poole on Bloomberg, Poole remarked that with the Fed having no where to turn in lowering short term rates if the economy soften significantly the Fed might consider buying long term treasuries to lower their yields which will flatten the yield curve.
Asset Allocation: At present we remain at a 70/30 ratio of stocks to bonds which has been the case for close to a year. Models suggest that a move to 55% equities might be in order but the timing is questionable. Should the Advance / Decline line of the stock market not surpass the January high, we will likely pare back our equity stakes. The A/D line typically peaks before major market highs and for the past year has been rising quite nicely. However if the stock market were to become bifurcated with a smaller number of stocks advancing it would be a warning of trouble ahead.
NY Times: China Leading Global Race to Make Clean Energy
Be careful out there
Long JNK, HYD, HYG, SHY