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High-yield bonds are underpriced against stocks

Take a look at this chart:

It's a pair of HYG (High-yield bonds ETF) against SPY (S&P 500 ETF), built in volatility-normalized price scale. For each side of the pair the price was normalized by realized one-month volatility.

This kind of charts should show mean reverting behaviour, because a long-term trend would mean that one side of the pair is consistently better in terms of return/volatility, which goes against CAPM. And since high-yield bonds and stocks have pretty close risk profiles, mean-reverting behaviour here is just a common sense expectation.

So, what we see is local underperformanse of HYG against SPY, creating an opportunity. Either last bond selloff came out a little bit too enthusiastic, or some yet unclear factor driving bond risk-off will soon go for stocks too.

Anyway, let's not forget that “The market can stay irrational longer than you can stay solvent.” (c) J.M.Keynes

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