To The Moon

The average high-yield bond now yields 8.14%. Six months ago it was 6.75%.

The weakest slice, rated CCC and below, went from 12.97% to 17.99%.

Same market, same six months. The average moved 1.39 points. The bottom moved 5.02.

WHY THE AVERAGE LOOKS CALM

An index is an average. An average can sit still while one part of it falls apart, because the healthy parts pull the number back toward the middle.

That is true of a bond index, a sector fund, and your own options book. If you only read the headline number, you find out about the tail last.

Here is how to split an average and see where the move really came from.

THE THREE CHECKS

Check one: write down the move in the headline number between two dates. Pick the dates before you look, so you don't choose the window that tells the best story.

High-yield index, 22 Apr to 22 Oct 2026: 6.75% to 8.14%, up 1.39 points.

Check two: split the move into layers, and subtract to see what each layer added.

Start with the base everyone shares. The 10-year US Treasury went from 4.30% to 4.96%, up 0.66 points. Every borrower felt that part.

Then the average junk borrower. Its gap over the Treasury went from 2.45 points to 3.18 points. It added 0.73 points on top of the base.

Then the weakest slice. Its gap over the Treasury went from 8.67 points to 13.03 points. It added 4.36 points on top of the base.

So for the weakest borrowers, about 13% of the rise came from rates in general and about 87% came from being the weakest borrowers.

Check three: track the gap between the weakest slice and the average, not just each level.

CCC minus the average: 6.22 points in April, 9.85 points now. The gap widened by 3.63 points.

A widening gap while the average looks fine is the pattern to notice. It says stress is concentrating, not spreading.

HOW TO RUN IT ON YOUR OWN BOOK (HYPOTHETICAL NUMBERS)

Hypothetical book: ten short puts on ten different names. Across the book, positions are down 2% on average this month. That looks like a quiet month.

Split it. Eight positions are flat to down 1%. One is down 4%. One is down 11%.

The average says nothing is wrong. The split says one name is carrying most of the damage, and that is the one to read on its own: what changed in that company, and is it the same trade it was when you opened it.

Now do check three. If the worst position was 3 points worse than the average last month and 9 points worse this month, the gap is widening. That is information the average hides.

TWO HONEST LIMITS

The CCC bucket is part of the high-yield index. So the 1.39-point move already includes the weakest slice, and the rest of the index moved by even less. How much less depends on how big the CCC slice is inside the index. I did not measure that.

These are yields to maturity on bond indexes, compared with a 10-year Treasury. The bonds in the index don't all mature in 10 years, so the gaps above are a rough layer split, not a precise credit spread. The direction is clear. The decimals are approximate.

AFTER READING THIS, YOU CAN

Take any average, an index, a fund or your own positions, split it into the shared base, the middle and the weakest slice, and see whether the move is spread out or concentrated in one place.

How far does your worst position have to drift from your book's average before you look at it on its own?

Stop guessing. Start calculating.

Live to fight another day. 🤙

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