Things you need to know about Falling Junk Bonds

At the peak of the 2008 credit crisis, when traders figured we’d all be reduced to hunting with sharpened sticks, junk yields were 22.3 percentage points above Treasuries. Junk typically trades at about 5.5 percentage points above Treasuries.

But we’re not living in normal times. Currently, junk bonds yield 3.75 percentage points more than comparable Treasuries, the lowest spread since September 2014, said John Lonski, chief economist for Moody’s Capital Markets Research Group.

Tight spreads are not a good omen for the high-yield market. Yield spreads typically rise because junk prices fall.

Why are junk prices so rich? In part, because investors are searching for yield the way Arctic explorers searched for the Northwest Passage, with similar results. The average money market fund yields 0.27%, according to iMoneyNet. The 10-year Treasury note yields 2.46%. At those levels, a 5.17% 12-month yield — currently sported by the largest junk ETF, iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Read More at : Investment News

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