3/1/2023 0 Comments Streets of rogue debtIf growth is not good, that's bad for the economy." "If you have too-good growth, the Fed will hike. "Good enough is the only thing that works right now for high yield," said Gene Tannuzzo, senior fixed-income portfolio manager at Columbia Threadneedle Investments. Some worry that buyers at current prices are betting on a so-called Goldilocks economy that may not come to pass. The junk bond rally comes at a time when US corporate defaults are low and rising, and the Fed is perceived by the market to be likely to raise interest rates as soon as December. In 2007, ahead of the financial crisis, high-yield bond spreads were around 2.5 percentage points. The spread between junk bonds and Treasury notes has since narrowed to 5.2 percentage points, a level that some investors say is too close for comfort. That signal proved false, as many junk-market signals do, and markets from junk bonds to stocks to commodities have rallied sharply in the intervening six months. The average high-yield bond spread over the past 10 years is 6.45 percentage points, according to Bloomberg Barclays data. High spreads beckon to investors who are willing to ride out volatile periods, giving them income that helps to cushion any losses on defaults. In early February, when the market was plagued by fears of a possible US recession, yields on junk bonds jumped to more than 10% and the spread to Treasurys reached 9 percentage points. Typically issued by lower-rated companies with large debt loads relative to their earnings, the debt's performance is widely tracked on Wall Street as an early warning system for coming economic downturns. Junk bonds tend to be volatile by their nature. The wireless carrier, which has fallen to fourth-largest in the US in terms of subscribers, posted a $302 million loss in its latest period and has lost more than $7 billion over its past three fiscal years.Ī rise in interest rates of a given amount would be more significant to holders of debt yielding 4% than it would if the yield were 6%. In June, the same bond yielded around 6%. Sprint Corp, for instance, has a bond due in 2018 that is yielding roughly 4%, according to MarketAxess. That means your bond becomes much more interest-rate sensitive." Kathleen Gaffney, who manages the Eaton Vance Multisector Income Fund, said: "When spreads get very tight as they are now, you're not getting paid as much for taking on credit risk. That is an outcome a few analysts, including Janus Capital Group bond guru Bill Gross, have pegged for this month. In a refrain all too familiar to investors in the age of low yields and crowded trades, the higher prices could point to more volatility when the Federal Reserve next raises interest rates. Some investors worry that surging prices and lower spreads are eroding one of junk bonds' strongest selling points: their tendency to generate positive returns even as rising rates hammer the value of safer bonds. In 2016, the iShares iBoxx High Yield Corporate Bond fund has returned 12%, beating the 7.8% total return by the S&P 500, according to FactSet.īond yields fall when prices rise, so spreads - the amount by which yields on junk debt outstrip those on Treasury debt - have fallen to their lowest levels in more than a year, according to Bloomberg Barclays data. The tide of money has pushed up prices and returns, attracting additional funds from investors.
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