In this series we are examining the characteristics of public debt, such as high yield bonds, compared with those of private credit instruments. Last week we covered interest rate risk and relative default rates. Now let’s turn to relative yields.

As our Chart of the Week shows (reprised from last week), there’s been a steady increase in the differential between junk yields (as measured by the BofA ML HY Index) and middle market loans (per the CDLI Index).

Besides pointing to the stable returns of senior secured credit, it demonstrates how bond yields fluctuate with market sentiment. Investors were spooked in early 2016 by fears that anemic economic growth would slip into a recession. That sent bond yields soaring and prices dropping. Equilibrium was regained as the year went on, but fixed income accounts were buffeted in the event. Private credit funds sailed through.

Indeed commentators suggest that with equities riding at record levels, volatility is poised to make a comeback. Currently the VIX is around 11.25, having settled down since its near-term peak of 22.5 just before the November election. As we highlighted in our 2017 outlook [link], any number of global surprises could trigger a VIX uptick.