Junk bond investors have had a tough month. The spread between the Barclays U.S. Corporate High Yield Index and the 10-year U.S. Treasury note has widened to 338 basis points from a low of 221 basis points on June 23, 2014.
There's no shortage of likely culprits:
--Change at the Fed, in the form of sooner-than-expected monetary tightening given the Federal Open Market Committee's acknowledgment last week that "the likelihood of inflation running persistently below its 2 percent objective has diminished somewhat."
--Systemic risk implied by the effective collapse, and subsequent government seizure, of Portugal's second largest bank, Banco Espitito Santo, S.A.
--A determination by the International Swaps and Derivatives Association that Argentina's decision not to make a bond payment last week triggered a credit event, implying the country's first technical default since 2001.
Last week, global macro portfolio manager Atul Lele, who oversees $4.5 billion for Deltec Bank & Trust Ltd., joined us on the set of Surveillance in New York to offer his perspective. Bottom line: As the Fed prepares to reduce its unprecedented liquidity, Lele is avoiding high-yield bonds.
Technical strategist Chris Verrone of Strategas Research Partners e-mailed us this morning with his take. He notes that high-yield bonds have pulled back eight times over the past 5 years, with an average decline of 9.9 percent. Since the current decline amounts to 4.3 percent, he thinks there is more to come.
Bank of America Corp. strategist Mary Ann Bartels agrees. She weighed in this morning on Surveillance, and while her primary focus is on equities rather than bonds, she sees a correction for all risk markets over the next several weeks. She is telling clients to buy, but also admits they may be wrong before they are right.
Back to high-yield bonds... Are we there yet? Probably not.