While many readers tend to focus on how equities perform on Fed days, we wanted to take a slightly different approach this morning and look at what impact Fed days have had on the high yield debt market. High yield debt and equities tend to trade in similar directions, so even if your main focus is on equities, you should have an understanding of how the high yield market reacts to the Fed. The top chart below shows the move in spreads on high yield debt relative to treasuries on the day of FOMC meetings since the start of 2013.
The top chart below shows the move in spreads on high yield debt relative to treasuries on the day of FOMC meetings since the start of 2013. When spreads increase, it indicates that investors are becoming more risk-averse (demanding more yield relative to treasuries), while tighter spreads indicate less risk aversion. In the 26 Fed meetings since the start of 2013, high yield spreads have tightened on the day of an FOMC policy announcement 15 times for an overall median decline of 1 basis point. In the chart, we have also highlighted the one meeting where the Fed hiked rates last December. Even on that day, spreads narrowed by 11 bps.
While high yield spreads have typically narrowed on the day of an FOMC meeting, we also wanted to highlight how they move following the meeting. Do spreads continue to tighten? Or do they move the other direction? Given that FOMC announcements typically occur on a Wednesday, we looked to see how spreads moved following an FOMC meeting over the remainder of the week. In these two days, the results show a continuation of the tightening with spreads narrowing by a median of 2.5 bps and tightening 14 out of 26 times. Focusing again on the December rate hike, while spreads actually narrowed in a relief rally on the day of that hike, in the two days following they erased all of the decline and more, widening by 22 bps. What is interesting about the overall results, though, is that while you would expect some degree of volatility in spreads on Fed days, the two days following a meeting have actually seen bigger moves in spreads than on the day of the actual policy announcement. Whereas spreads have moved up or down an average of 7 bps on the day of an FOMC meeting, they have seen an average move of 11 bps in the two days following meetings.