High yield falls out of favour

Jeff Rosenberg, head of credit strategy at Banc of America Securities in New York, explains the technical factors behind the bank's underweight recommendation for high yield

We changed our recommended weighting on high yield to underweight in mid-March, effectively ending our down-in-quality theme for the time being. While we continue to believe that default rates will remain stable at current levels, adjusting for the inclusion of the autos, high-yield spreads stand only 20 basis points wide of March 2005 levels. Moreover, as shown in chart 1, our long-term model of high-yield spreads has only shown two negative residuals since 2002: February 2005 and currently