Macro risk from U.S. High Yield OAS

High yield OAS divergence: A quiet risk-off signal for U.S. Stocks

One risk for the U.S. equity market is a that higher low for the U.S. High Yield Option Adjusted Spread (OAS) sets up negative divergence against the higher high that the S&P 500 achieved in late October. As shown in Chart 1, when the high yield OAS stops narrowing and begins to bottom while equities continue to advance, the risk for a "risk-off" widening of the high yield OAS increases.

Chart 2 indicates that if the U.S. high yield OAS sustains a widening trend—reflecting deteriorating credit conditions—above the 3.13–3.18 area, it could serve as a broader risk-off warning signal, in our view.

Chart 1: S&P 500 (top) and the U.S. High Yield OAS (bottom)

Chart 2: S&P 500 (top) and the U.S. High Yield OAS (bottom)