A subscriber asked about the relationship between the high-yield bond spread and stock market return, with focus on when the latter is entering a bear market. To investigate, we use the ICE BofA US High Yield Index Option-Adjusted Spread (HY Spread) as a proxy for the high-yield bond spread and SPDR S&P 500 ETF Trust (SPY) as a proxy for the U.S. stock market. We look at the following interactions between HY Spread and SPY:
- Daily lead-lag correlations between HY Spread/change in HY Spread and SPY return.
- Monthly lead-lag correlations between HY Spread/change in HY Spread and SPY return.
- Average next-month SPY return by range of monthly changes in HY Spread.
- Monthly changes in HY Spread before the worst next-month SPY returns.
- Next-month SPY returns after the biggest monthly jumps in HY Spread.
Using daily values of HY Spread and daily dividend-adjust SPY prices from the end of December 1996 (limited by HY Spread) through mid-June 2022, we find that:
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