Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
Junk Bond Yields Break Below 6% for the First Time
Does anyone see this as a temporary "risk on" signal? With high yield bonds being a second cousin to the equity market I often notice that HY bonds will move in unison with the equity market.
Reply to @bee: I think you put it very well. Currently, it's risk-on. Conversely, rising rates aren't generally good for the economy. And, if junk bonds tumble in value, as with most other types of bonds, their rates will rise. Smaller cap companies will be especially hard hit by higher borrowing costs. Some could be cut off completely from the loan market. This would not be good news for high yield bonds or stocks. (pick your poison:-)
Reply to @bee: Even companies with 'junk' credit rating is able to borrow at lower spreads than before. Historically 6% spread is considered minimum acceptable so the market participants are dismissing the possibility of default at this time. This probably means one of the two things:
1) They are optimistic of the prospects of the economy 2) They are simply blinded due to need to generate yield somehow?
I have the feeling it is the latter.
However, whatever the reason, this has the desired effect of increasing the health of corporate balance sheets that debt service is less demanding and if they chose, they might invest and expand and could spur growth.
Comments
http://finance.yahoo.com/news/why-goldman-thinks-dump-bonds-194151631.html
?? should we start dumping bond also?
1) They are optimistic of the prospects of the economy
2) They are simply blinded due to need to generate yield somehow?
I have the feeling it is the latter.
However, whatever the reason, this has the desired effect of increasing the health of corporate balance sheets that debt service is less demanding and if they chose, they might invest and expand and could spur growth.