Has the US high yield market reached a sweet spot?

The US high yield market spread, measured by the option-adjusted spread on the Bank of America/Merrill Lynch US HY Master II index, has been on a rising trend since the end of 2014. As at the end of January 2016, it sat at around 770 basis points, which is attractive relative to its historical fair value spread of 500 basis points, according to Morningstar analyst Carlos Gonzalez-Lucar.

Given the sharp fall in oil prices and ensuing deterioration of fundamentals in the energy sector (where a double-digit default rate is expected), it is worth highlighting energy companies' debt accounts for only 10% of the US high yield market (15% at the highest point in 2014). The energy sector has, to a large extent, been to blame for the indiscriminate sell-off experienced by the asset class over the past 15 months. Excluding energy, however, valuations are currently attractive as the 'ex-energy' high yield spread is 700 basis point - more than enough compensation for the ex-ener...