I've pasted the 1-year charts of spreads comprising Merrill Lynch’s High Yield Master Index and US Corporate Master Index as of March 4 closing. All of these are Option Adjusted Spreads (OASs), which essentially show the true difference in yield (the spread) between the index and its benchmark Treasury after factoring out callable options or other embedded bells and whistles. Merrill’s Master Indices are widely recognized as being the best gauge of credit-market spreads.

I wanted to give you a visual depiction of exactly what's happening in the corporate and high-yield credit market at the moment. A picture is worth a thousand…dollars, expressed in percent, whose difference in yield is plotted as a line. Yeah, that works!

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Click to enlarge


Click to enlarge

As you can see, since early March, Corporate Investment Grade (subjective, but I digress) spreads have come in substantially from 6% to 4.78% as of yesterday’s close. It goes without saying that this isn't a small move in spreads. Spreads are back to levels seen in October 2008. They're improving, however still way above levels seen during normal economic-recovery scenarios. High Yield spreads have had an even greater compression from 18.86% down to 13.23%. They're also improving, but way above normal recovery levels.

What this is essentially telling us is that -- while we're no longer in an economic death spiral -- we're not set to experience your typical economic recovery, either. Given spreads are back to their October 2008 levels (which also happens to be when the s--- hit the fan in equity land), how they act from here is very important.