Tags: Junk | bonds | Treasurys | rate

Junk Bonds Hit the Skids: Is the Party Over?

By    |   Monday, 03 June 2013 09:21 AM

Could the four-year, red-hot rally in junk bonds finally be over?

The spread between the yield on junks bonds and equivalent-maturity Treasurys soared 0.18 percentage point Wednesday to 4.39 points, the highest premium since April, according to The Wall Street Journal.

Treasury yields themselves are rising, of course. And often increasing interest rates are good for junk bonds, as they indicate economic strength, which is good for even low-rated companies, and therefore the spread usually narrows.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

But not this time around, The Journal reported.

Now rates seem to be rising amid concern that the Federal Reserve will begin tapering its quantitative easing (QE). That QE had sent the Barclays US High Yield Index below 5 percent for the first time in its 30-year history earlier this month.

"When rates have risen, high yield spreads have compressed and that is the thing that didn't happen this time," said Michael Kessler, a credit strategist at Barclays, said.

But in the week ended Wednesday, investors withdrew almost $880 million from junk bond mutual funds and exchange-traded funds, the biggest outflow since early February, according to Lipper data cited by The Journal.

"The salad days for risk assets might be drawing to a close," Thomas Byrne, director of fixed income at Wealth Strategies & Management, told The Journal.

Kessler told the paper that "high-yield investors [may] not be as well protected in a rising-rate environment as they had been previously."

Junk bonds lost ground in May for the first time in 11 months, according to Bank of America.

"Risk assets remained volatile, driven by the selloff in Treasurys," Barclays strategists Jeffrey Meli and Bradley Rogoff wrote in a commentary obtained by Bloomberg.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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The spread between the yield on junks bonds and equivalent-maturity Treasurys soared 0.18 percentage point Wednesday to 4.39 points, the highest premium since April, according to The Wall Street Journal.
Junk,bonds,Treasurys,rate
308
2013-21-03
Monday, 03 June 2013 09:21 AM
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