High Yield Bond Speads Widening Signal 48% Recession Odds, Fridson Says

Speculative-grade bonds may rally after relative yields on the debt climbed to the highest level since June 2010, according to Martin Fridson, global credit strategist at BNP Paribas Investment Partners.

Spreads on the debt signal a 48 percent chance that the U.S. will slip back into recession, using the Fridson-Kong Model, an econometric measure. The probability was 12 percent on July 27. The increased odds compare with a “consensus” view of 33 percent, Fridson said in an e-mail. That suggests high-yield bonds may have fallen too much, he said.

The extra yield investors demand to own speculative-grade bonds instead of Treasuries rose yesterday to 719 basis points, or 7.19 percentage points, from 532 basis points on July 27, according to Bank of America Merrill Lynch index data. Spreads were the widest since reaching 727 basis points in June 2010.

High-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.

To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net

To contact the editor responsible for this story: Pierre Paulden at ppaulden@bloomberg.net