High Yield Bonds Under Pressure

High yield corporate bonds have been a remarkably resilient asset class throughout the post crisis period. This included emerging from the rising default wave that spread across the asset class in 2015 and 2016. And while high yield bonds continue to hover near all-time highs, a renewed threat that first emerged for the category back in the spring is continuing to pick up steam. It remains to be seen how much longer high yield bonds can resist the pressure.

Pressure Rising
It is worth noting that high yield bonds (NYSEARCA: HYG) are a category that remains as expensive as ever. For example, high yield bond spreads relative to comparably dated U.S. Treasuries are as tight as they have been throughout the post crisis period. What does this mean? That the premium being paid to investors for taking on the additional risk of lending money to a company that may or may not meet the interest payments or repay the loan at some point in the future versus the guarantee of lending money to the U.S. government is as low as it has been since before the global economy nearly imploded.

The effective yield that investors are being paid on an absolute basis for taking on the risk of owning what were previously known as "junk" bonds (NYSEARCA: JNK) before the retail investor marketing machine decided "high yield" would be a better sell is also about as paltry as it has ever been from a historical perspective. For example, the current effective yield on high... Read more