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Oil:US high yield correlation breaks down

While not a longstanding indicator, the relationship between crude and US high yield has strengthened as the predominance of shale gas companies have become a larger part of the sector, at its peak it was around 15% of the market.

But, as is evidenced by the graph below, there has been a clear decoupling during July. While the oil price has dropped back, US high-yield bond prices have continued to rise.  

According to Nick Hayes, manager of the AXA WF Global Strategic Bonds fund, there are three primary reasons why this correlation has broken down.

The first is that as a result of defaults and the fall in price of some of the bonds, energy now makes up a smaller part of the high yield index. And, as it gets smaller so the price of oil will have less of a bearing on the broad index.

The second factor is the move down in government bonds. This move is forcing some investors further up the risk spectrum into high yield. And, the third reason, which is linked to this, is that as yields have fallen, so the hunt for yield has taken precedence over worries about defaults. 










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