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IPFS News Link • Economy - Economics USA

When Yields Are No Longer "High" - What Junk Bonds Are Saying Today

•, by Hozef Arif

2019 has been a banner year so far for this riskiest segment of the publicly traded corporate bond markets, with a stellar +11.1% total return year-to-date and in the process driving yields down to 5.8%, a level not seen in HY since January 2018. HY performance also compares very favorably to +18.8% total return for the S&P500 and is nearly equal to the +11.6% total return for the Russell 2000.

This search for yield has culminated in events like issuance of an 8.5 year maturity HY bond @ 3.875% by a fast food chain owner, Restaurant Brands (ticker: QSR). This is among the lowest yield for an 8+ year maturity corporate HY bond since Ball Packaging (ticker: BLL) issued a 10-year HY bond @ 4% in the spring of 2013, right before the market got hit with a "taper tantrum" selloff in rates that summer. 

While conditions were quite different at the time (no signs of yield curve inversion in 2013, for one), any number of catalysts today could trigger a selloff in rates from their current low levels - less dovish European Central Bank ? German stimulus ? Market speculating a pickup in global growth ? Fed failing to deliver rate cuts on the market's schedule ? Hard to say and predict. Nonetheless it may be instructive to see what clues the current HY market offers in the context of history if the one-way ride lower in interest rates were to suddenly reverse. After all, falling interest rates have contributed to half the total return in HY bonds this year.