Rieger Report: Corporate Junk Bonds – “Danger, Will Robinson!”

The bond markets are certainly not “Lost in Space”1. There is good rationale as to why the bond markets are in the position they are today; compressed spreads are the result of low rates coupled with strong demand out pacing supply for yield assets.   However, the homogenization of the US corporate bond markets is worrisome and should begin to raise some eyebrows in the junk bond markets.  What am I worried about? Credit spreads widening.

Chart 1: The S&P 500 BB High Yield Corporate Bond Index spread to the S&P 500 Investment Grade Corporate Bond Index:

Source: S&P Dow Jones Indices, LLC. Data as of June 7, 2017. Chart is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

Some rationale behind the angst:

Chart 2: Select indices and their yields over time:

Source: S&P Dow Jones Indices, LLC. Data as of June 7, 2017. Chart is provided for illustrative purposes. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

The past is not prologue and no one has ever seen this type of market before. Monitoring the spread risk in the high yield sectors seems prudent at this juncture.

1Lost in Space was a 1960’s sci-fi television series of the Robinson family traveling through space. The protagonist son, Will, was protected by a robot who would warn him of pending danger by waiving its arms and saying “Danger, Will Robinson”.

For more information on S&P’s bond indices including methodologies and time series information please go to SPDJI.com.

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