High Yield Spread and VIX

Investors can use the high yield spread and VIX to assess investor sentiment and stock market expectations. Both have proven to be reliable indicators, but no indicator is 100% accurate so investors could use these indicators as part of their overall investment analysis and strategy.

The high yield spread is the percentage difference between the yields on high yield bonds, also called junk bonds, and a lower risk benchmark. The benchmark is typically government bonds, like US Treasuries, but it could also be investment grade bonds or an index. This URL from the Federal Reserve Bank of St. Louis’ FRED database shows the high yield spread (https://fred.stlouisfed.org/series/BAMLH0A0HYM2).

High yield bonds have higher credit risk so a wider-spread means investors require a greater return to be compensated for greater risk. Conversely, a narrow-spread means investors expect a lower return in a lower risk environment. The high yield bond spread is considered a leading indicator of economic downturns and market corrections. It also measures the risk tolerance of investors and market valuation. As can be seen in the graph from the FRED database, the high yield spread in the US is currently about 3% but spiked to nearly 20% during the 2008-09 recession.

VIX, the Chicago Board of Exchange Volatility Index, measures the market’s expectation of 30-day volatility for the S&P 500 Index by using index options. This URL from the FRED database shows VIX (https://fred.stlouisfed.org/series/VIXCLS).

·      VIX greater then 30 generally indicates high expected volatility and potential market turbulence.

·      VIX between 15 and 20 generally indicates a normal market environment.

·      VIX below 20 indicates low expected volatility.

As shown in the graph from the FRED database, VIX is about 15 currently, but spiked to 45 in April 2025 when the US announced a new tariff regime, and it was about 80 during the 2008-09 recession.

Although not perfect, the high yield bond spread and VIX are two data driven indicators that investors can use to help measure investor sentiment and market expectations.