High Yield Bonds and Oil

How are they related? I heard on MSNBC this quote " sell high yield, oil is not raising".

The only thing that comes to mind is that oil companies are capital intensive and require a lot of debt.

Or that a bunch of oil companies have debt that is now high yield?

I get it…OIL companies are all highly levered and HIGH YIELD. since the price of oil is down, they are super risky and bond holders may not get paid back. That’s why they are saying sell.

They might not have been referring specifically to the debt of oil companies. High yield bonds are a risk asset, and during the latest sell off, risky asset prices have been positively correlated with the price of oil. This was for a few reasons: 1) people were concerned about the solvency of energy companies, 2) low oil prices hurt the economies of many countries, and 3) low oil prices could be indicative of other slowdowns in some economies (i.e. China). So, an increase (decrease) in oil price was seen an an indicator to buy (sell) high yield debt, as well as any other risk assets.

I think there was some confusion among finance media and investors as to which of the oil prices or economy was driving the other. There led to a lot of irrational trading activity and price movements in the past few months.

It’s been a while since I’ve done these kinds of macro analyses, but (and this may be a variation on ohai’s point), but I recall that high yield is out of phase (i.e. less correlated) with the equity and commodities cycle. This is a good reason for having an allocation to high yield (benefits from low correlation). High yield seems to decline before equities decline. I think commoditiy prices are supposed to lead both high yield and equity declines because they are a harbinger of future economic activity. I have to go brush up on this to be sure.

Anyway, I suspect the idea is that when commodity prices are low, this tends to signal a slowdown in production, which many people read as being a sign of being just past the top of the business cycle. If that’s true, then the idea is that high yeild will start to tumble before equities do, so get out.

However, oil is a tricky one, because many people view a low oil price as a kind of stimulus for consumers (at least those for whom oil and gas is a substantial expense). So if it’s just oil that is down and not the rest of the commodity complex. I do know that the GSCI Commodity index has been down for a looong time, but I also recall that the index is so heavily weighted to energy and oil (like nearly 50%) that I’m not sure if the other commodities like copper say the same thing. If it’s just oil that is down, that would seem to indicate increased and/or cheaper production rather than a collapse in demand.

I am curious and will investigate now.