High yield spreads hit a new low for the cycle last week as measured by the BofAML High Yield Master II index. The new spread of 4.3% over treasuries is better than the mark set in 2011 at 4.53%. However, we’re still not quite back to the ’07 tights, when the index spread was just 260 bps.
Of course, since the yield curve is now lower than it was in ’07, all in yields are much lower than they were at that time. If spreads were to rally to where they were back then, it would imply that high yield credit would be trading at a yield with a 4 handle.
Over the past decade there have been two major trends in the asset management industry: the growth of ETFs and the shift in asset allocation away from Equities towards Fixed Income. Below are some charts that use data from the Fed’s Flow of Funds report to look at both of those trends.
The first set of charts show the growth of ETFs relative to mutual funds. In 2000 only 2% of equity assets in listed funds were in ETFs and Fixed Income ETFs didn’t even exist. Today 17.7% of equity assets and 5.5% of Fixed income assets are in ETFs. Combined ETFs hold 12.5% of assets in listed funds–$1.3T in ETFs vs. $9.2T in open end mutual funds (Note: I excluded closed end funds to make this easier on myself).
Since I had the data from the first two charts, I figured it would be interesting to put together the chart below, which quantifies how much share Fixed Income has taken from Equities in the last decade. In 2000 Fixed Income made up only 25% of the assets in listed funds. Thanks to the financial crisis, that number has grown to 40% today overall (but only 17% of ETF assets are in Fixed Income). It’s worth noting that a standard balanced portfolio is 60% Equities 40% Fixed Income, which means Fixed Income allocations may be reaching a tipping point.