Junk Bond Spreads are a Positive Sign for the Economy

by Marilou Moursund on June 26, 2018

in Bonds,Debt,Economic Indicators,Fixed Income,interest rates

Just like stocks, junk bonds perform better when the economy is strong.  This is because the companies are earning enough money to cover their interest payments.  When the economy weakens, the spread versus the comparable Treasury bond widens as investors move to less risky assets.  Junk bonds are performing better than investment grade debt this year.  From the linked Wall Street Journal article:

Government bonds are wilting under signs of rising inflation and an accelerating economic expansion, and high-grade corporate bonds have fallen as changes to the tax code and softening global growth mean many longtime buyers don’t want or need the debt.

But high-yield, or junk bonds, are closely geared toward the strength of the U.S. economy. With U.S. growth picking up and business confidence soaring, high-yield bond prices are holding steady even as the Federal Reserve has signaled it is leaning more aggressively on its path of interest-rate increases. When rates are rising, bond prices often tumble as investors adjust to rising yields in benchmark debt.

Unlike multinational corporations, operations of high-yield borrowers are concentrated within the U.S., meaning their financial results are less likely to suffer from the impact of rising global trade tensions, the disappointing pace of growth in Europe or volatility in emerging markets.

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