The troubles in the high-yield bond market have been closely linked to crude oil's slide. But this conventional wisdom doesn't withstand a peek under the hood of the most popular way to play so-called junk bonds.
Taking the popular iShares high-yield ETF (HYG) as a proxy for the space, one finds that there just isn't a gigantic amount of energy bonds contained therein. The energy sector's weighting in the ETF is only 11.4 percent. That makes energy the fourth-most-prominent sector in the product; communications is No. 1, with more than double the weighting.
In terms of simple numbers, only 16.4 percent of the bonds in the sector are energy bonds.
Given this mild allocation, one wouldn't expect the ETF to track energy stocks — and it really doesn't. Over the past five years, the HYG's daily correlation with SPDR's popular energy sector ETF (XLE) is 0.66.
Correlations run from -1 to 1, with 1 representing perfect correlation, so 0.66 may appear to be a tight relationship. However, the high-yield ETF's correlation to the overall S&P 500 is 0.73.
This means that if one wanted to predict how the HYG traded in a given day, one would be better off consulting the S&P than the energy sector alone.
Granted, the relationship between crude oil and high-yield bonds has been rising. Over the past five years, the correlation runs at 0.31; in the past year, that has risen to 0.36. Presumably, high-yield bonds are being viewed as increasingly sensitive to crude oil, given the potential for defaults among companies exposed to oil moves.