Displaying items by tag: spreads

(New York)

While the stock market is getting all of the attention, the bond market is experiencing a lot of turbulence as well. The riskiest corners of the debt market, including junk bonds and loans, are on pace for their worst month since the US downgrade in August 2011. High yield’s spread to Treasuries has surged a whopping 110 basis points since the start of the month, and unlike in stocks, there aren’t signs of a rebound. The average yield on the index is 8%.

FINSUM: It is reasonable to be nervous about credit right now given the huge volume of issuance in recent years and the pending threat of a recession and accompanying earnings slowdown.

(New York)

One of the best indicators of stock market performance is actually in bonds. Because they trade based on fundamentals, high yield bonds tend to be strong leading indicators of stock performance. With markets swinging all over the place, now might be a good time to see what junk bonds are doing. The answer is that the sector looks to be in good shape, with spreads holding steady and no real sign of concern.

FINSUM: Junk is probably not going to really worry until we get very near, or into an inverted yield curve, as a recession would be rough on the high yield market.

(New York)

By now one would have expected junk bonds to have experienced a large selloff. The sector already had a low spread to Treasuries, has mountains of fringe credits, and has been facing a period of rising rates. Yet, high yield has been performing very well, with the weakest credits, paradoxically, performing best. There has been no sustained flight out of the sector, and spreads are higher than at the start of the month, but still not even where they were for much of the year.

FINSUM: The big risk here is that investors aren’t being paid enough for the risks they are taking. The whole junk sector, not to mention the loads of BBB credits that are technically investment grade, are very susceptible to recession and higher rates. At some point there are going to be some major losses.

(New York)

Many investors are currently worried about the bond market. There is a lot of uncertainty over just how much rates and yields will rise and what that might mean for the economy. Well, Bloomberg is taking a strong stand on the issue, arguing that a bond Armageddon is on the way. The paper says that all the focus has been on ten-years, but that 30s might be where the danger is. They are within shouting distance of their 2015-2017 highs, and are very close to the 3.24% level, which would signal the difference between an orderly selloff and a full-on rout.

FINSUM: There may be some short-term volatility, but our overall view is that there won’t be a cataclysm in bonds. Global populations are aging and people need income. We expected yields to stay in check and spreads to narrow even if sovereign yields rise.

(New York)

There have been a lot of bearish articles lately and few bullish ones. But today we are running are covering an optimistic argument that supports our own view of the market. We have been saying for some time that inflation is not necessarily bad for stocks—they are in fact an inflationary hedge. Now, Barron’s is making a key point about the current relationship between stocks and bonds to show why equities don’t stand to lose much if inflation and rates rise. The reason why is that the spread between equity yields and Treasuries is over 300 basis points, meaning there is a lot of room for rates to move higher before they would be wounded.

FINSUM: We think this is quite an astute view. And while we don’t believe the market is in for another strong run, we think it has a nice cushion for modest gains.