Corporate bond yields demonstrate that risk is back
I woke up this morning thinking about James Baker’s October 1987 comments on the dollar which many feel precipitated the 1987 crash. This was on my mind as I contemplated the implications of Obama’s recent regulatory announcement bombshell. The market has been jittery the last two days and the VIX is way up. So, 1987 was in the back of my mind.
Then I read about the problems Bernanke’s confirmation is having and saw the chart below from David Rosenberg’s “Breakfast with Dave” missive today.
Rosenberg says further into his article:
The last time we had a sudden and unexpected turnover at the Fed was back on June 2, 1987 when Paul Volcker surprisingly announced his resignation. That day, the S&P 500 slipped 0.5%, which was a big deal then since we were in the throes of a major rally, the yield the 10-year note surged 27 basis points, the VIX index jumped 5%, the DXY was crushed 1.2% and gold rallied 1.3%. Keep that in your back pocket just in case.
Exactly on point.
If junk bond yields are this low, you know that people are reaching for yield by taking on more risk – just as you would expect in a zero-rate environment (see Reaching for yield in the post-TARP era for how this relates to bank risk).
This is a dangerous game.
Source
Breakfast with Dave – David Rosenberg, 22 Jan 2010, Gluskin Sheff
That is a very bold claim made by someone who doesn’t know the history. Historically the yield on junk bonds was 8.39%. Now it stands at 9.35%- go figure. More so, the historical Yield spread on junk bonds is 3.61%. Now it stands at an incredible 7.98%. Wow – so for the naysayers, the high yield bonds are apparently still the best fixed income class for the next 12-18 months.
I worked in High Yield in various capacities throughout the 1990s. I also created a High Yield Bond index for a major investment bank. So, I actually do know the market and credit.