Get ready to pay more to earn less relative to stocks if you’re looking to jump into the high-yield debt market.
Historically, debt rated below investment grade has yielded an average 4.2 percentage points more than stocks since March 1995. That relationship has been turned on its head.
Does this mean stocks are cheap or bonds too expensive?
Junk debt may be the loser here. Royal Bank of Scotland Group Plc’s John Briggs sees “little upside” in credit. And strategists in Morgan Stanley’s wealth management division don’t expect much from speculative-grade company debt in the next year or two -- predicting annual gains of 5 percent or less. That’s after returns averaged more than 18 percent for each of the last five years.
Yet, as this year has shown, it’s hard to predict a market still driven by unprecedented central-bank stimulus. A sixth year of near-zero borrowing costs from the Federal Reserve is prodding investors to buy both bonds and stocks. Investors have poured $5.8 billion into high-yield bond funds and $34.6 billion into equities since the end of December, Wells Fargo & Co. data show.
Yields on the company debt have dropped to 5.05 percent from 5.64 percent at year-end, according to the Barclays U.S. Corporate High-Yield index. The earnings yield on the S&P 500 is 5.8 percent, about the same as at the end of last year.
The gap between the two has evaporated since December 2008, when speculative-grade securities yielded about 15 percentage points more than the 8 percent earnings yield on stocks.
Perhaps the Fed’s war chest of stimulus has rendered these historical relationships meaningless. Or, perhaps we’re overdue for a day of reckoning.
To contact the editors responsible for this story: Shannon D. Harrington at firstname.lastname@example.org Caroline Salas Gage