Earlier this year when the markets were gripped by uncertainty over a possible U.S. recession, junk bond yields surged to over 10% and the spread to Treasuries expanded to 9 percentage points, which reflected the growing premium on speculative-grade debt and investors’ willingness to ride out volatile periods with higher yields to cushion against potential defaults.
However, as uncertainty dissipated and the markets rallied, the spread between junk and Treasury notes has narrowed to 5.2 percentage points. In contrast, the average high-yield bond spread over the past decade is 6.45 percentage points.
Some observers are concerned that junk bond traders may be betting on a so-called Goldilocks economy.
“Good enough is the only thing that works right now for high yield,” Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments, told the WSJ. “If you have too-good growth, the Fed will hike. If growth is not good, that’s bad for the economy.”
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Nevertheless, there are those that believe junk bonds may continue to plod along, especially with high valuations in other markets, greater global stability, a rebound in the energy market and the expansion of easy monetary policies around the world.
For more information on the speculative-grade debt market, visit our junk bonds category.
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