Despite the recent widening in high-yield new issue spreads, coupons still have room to rise before reaching fair value by historical standards, said John Lonski, chief economist at Moody's Investors Service. The median yield spreads for newly offered Caa-rated paper widened to 653 basis points over Treasuries for the second half of March, versus 566 for the first month. Still, Lonski noted Caa paper was being offered at 775bps over during the benign credit environment from 1994 to 1997, indicating coupons still have a ways to go.
During that three-year span, rating upgrades outpaced downgrades, while year to date corporate credit rating upgrades comprise 46% of revisions. "It's a far from alarming credit situation, but it doesn't justify extremely low yields," Lonski explained, adding current default rates are also above those during '94-'97 which further suggests high-yield paper remains rich and has room to widen. "The widening does not supply a reason for panic... but represents a correction of perhaps an earlier overbought market," he noted.
