We are seeing a surge in delinquent loans at commercial banks. As this chart shows, that typically means we would see a spike in high yield bond spreads (meaning high yield prices would drop.)
The fact that this has yet to happen should not be reason to believe it won’t. We of course are heavily invested in high yield bonds, but that does not mean these are long-term positions. The systems used are trend following meaning they will ride the wave as long as possible. By design the system has a tight sell level. Delinquencies at commercial banks that turn into defaults in the high yield market would be a welcome sign for us as it will create far more attractive opportunities in the future while we watch from the sidelines in money market or short to intermediate-term government bonds.