The Merrill Lynch High Yield Master II Index, often used when assessing the
state of the broad High Yield market, suggests that Junk bonds have returned
a whooping 51% year-to-date, thereby outperforming the SPX by a cool 29%.



I am notoriously sceptical about indices (reasons include geometric returns
versus dollar weighted returns, index inclusion/exclusion problem, changes
in share of CCC rated paper, etc). Looking at High Yield mutual fund indices
only partly solves such issues as these indices have their own flaws but f.i.
Lipper's HY index ytd return was in the low 40's and thereby almost 10
percentage points (so actually 20%) lower than the Master II's.

Mid August 2008 was the time when the HY market started its bold down
move of -31% in less than three months.


Since that same August 2008 the ML index recovered and has eventually
returned roughly +14%, indicating that everyone in HY land should be well
ahead of their high water marks (which I doubt) and have outperformed the
SPX by 28% during that time.


Issuers went into this period with very high leverage and during that same
period reported earnings plunged to a degree not seen seen since 1871
(by 99%, that is), with y-o-y industrial production at -10.7%, y-o-y retail sales
down -5.3% and capacity utilization at 66.6%.

Defaults have so far come in somewhat below consensus expectation but some
issuers just had their chance to buy some time by extending their maturity
profile selling new crap debt, some did exchange offers and/or were able to raise
some capital. However, things don't nearly look as good as indices may suggest in
my view.

So here is my conundrum, which is actually two-fold:

1) High Yield indexes show stellar performance (even those including only
investable mutual funds, such as Lipper), implying investors in HY land
should be well ahead of their high water marks. Is that actually the case?
And if it is not - which I assume - where has all the positive index performance
come from?

2) A very serious deterioration on the operations front meets a return of some
+14% for the asset class since August 08. Why is it the case? Looks like the
markets are incredibly confident they can buy themselves out of the doldrums.

Not sure if these questions best be addressed by micro- or macro economists
as the former seem to be mostly wrong on particular things with the later being
just as wrong in general.