Junk Bond

Bubble Bursts!

U.S. Junk Bonds Enter Distress, Spreads Top 1,000 Basis Points

The average spread over Treasuries for bonds in the Bloomberg Barclays U.S. Corporate High-Yield index widened 37 basis points to 1,013 basis points, the highest since June 1, 2009, and a level that is typically associated with distress. The measure has surged from 550 basis points two weeks ago.

The index move caps a tumultuous week for credit markets as investors flee funds that buy all types of corporate debt. A record $35.6 billion was pulled from investment-grade bond funds in the week ended March 18, and $2.9 billion was withdrawn from high-yield funds, according to Refinitiv Lipper.

Still, some analysts are warning the worst is yet to come for the market amid growing fears about the economic fallout from the fast-spreading corona virus hoax. The amount of distressed bonds and loans in the market had swelled to $533 billion as of Thursday, more than doubling from two weeks ago, data compiled by Bloomberg show.

DYI:  Another has fallen from the sky as this time it is high yield paper or more commonly called junk bonds.  5 year T-notes are yielding 0.56% as compared to Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)* yielding 7.68%!  Finally the spread is enough compensation for the risk in high yield paper plus at this yield you will have a good possibility of overcoming the much understated rate of inflation.  Dollar cost averaging only at this point if the spread moves beyond single digits then lump summing would be advocated.

*VWEHX current average effective maturity is 4 years as compared to 5 year T-notes or respectively 7.68% to 0.56%.

Till Next Time

DYI