High Yield Sell Down Casts Shadow on Resources

A dramatic sell off in high yield debt has begun destabilising markets. However, as the first chart illustrates, the crash in prices has been a long time in coming. The upward drive of high yield bond prices, supported by Federal Reserve monetary polices, has been losing momentum possibly since as early as 2013 as the inevitable withdrawal of monetary stimulus was becoming clearer with reduced asset purchases followed by rising expectations of an interest rate rise adding progressively to the burden on prices. A continuing diversion of funds, at the margin, to less risky risky assets will have adverse consequences for the resources sector which is typically seen as the riskiest end of the mainstream equity market. The second chart illustrates the connection over the past two years between high yield security prices and Australia’s small resources share price index. Both indices reflect the ebb and flow of risk appetites. Most worryingly is the evident decline in high yield prices over the last day or so which appears not to have yet affected Australia’s resource sector prices.