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US Junk Yield at terrifying lows

As of 2014-06-20, the yield on Moody’s composite speculative-grade bond index fell to a record low 4.93%, an area, Moody’s economist John Lonski calls “terra incognita”.  The spread between speculative-grade bonds and US Treasuries fell to 3.21 percentage points – the thinnest since 2007-07-12.

How low is that?  Before 2008, the record low month-long average for speculative-grade bonds was 6.93%.  The spread over Treasuries: 3.02 percentage points.

What is the implication?  A rise in interest rates or an increase in defaults could make junk-bond prices plummet.  In 2008, high-yield bonds yielded more than 20% as defaults soared.

Should you sell or wait?  Keep this in mind:  When there’s a stampede out of high-yield funds, managers have to sell their best bonds to meet redemptions, because those are the only bonds that they can sell. By the time the stampede is over, managers can be left with their worst bonds — and their funds’ prices can be devastated. The worst three-month performance for the category: A loss of 27.6% from September through November 2008, says Morningstar.

Reference:

USA Today, John Waggoner, 2014-06-24, “Junk Bond Yields at New and Terrifying Lows”