Junk bond yields are quickly jumping ahead of U.S. Treasury yields. The disparity may signal a good time to enter exchange traded funds that track high-yield bonds if investors stomach the risk.
According to Martin Fridson, global credit strategist at BNP Paribas Asset Management, yield spreads between corporate junk bonds and Treasuries hit a new recent high, reports Murray Cooleman for Barron’s.
For instance, the option-adjusted spread on the BofA Merrill Lynch High Yield Master II Index ended at 7.54% on Tuesday, which was a little below the 7.58% high last observed on Dec. 1, 2009.
Fridson mentioned that this poses an excellent entry point into junk bonds, given that an investor is “absolutely convinced” we aren’t heading for a recession. [High-Yield ETFs Rally but Bearish ‘Crossover’ Looms]
Based on an analysis of the yield spreads, Fridson calculates that there is a 63% chance of a recession.
The analyst points out that the rise in the high yield risk premium was a result of an increase in perceived risk, noting that the distress ratio was up from 17.1% to 18.0%. “The distress ratio is the percentage of issues in the index yielding more than 1,000 bp over Treasuries,” according to Fridson. “Our historical analysis indicates that those issues have a 23.5% probability of defaulting within one year, versus only 1.2% for non-distressed issues.”
- iShares iBoxx High Yield Corporate Bond Fund (NYSEArca: HYG). HYG has a 12-month yield of 8.06%.
- SPDR High Yield Bond ETF (NYSEArca: JNK). JNK has a 12-month yield of 8.28%.
“High yield bonds got slaughtered early last month and have been very volatile, like stocks, since the lows were put in place on Aug. 8,” writes J.C. Parets at All Star Charts. “The question going forward here in the bond market is: Where would you rather be – low yielding Treasury bonds or higher yielding (junk) bonds?” [Treasury ETFs Rally]
iShares iBoxx High Yield Corporate Bond Fund
For more information on high-yield bonds, visit our junk bonds category.
Max Chen contributed to this article.