Riskiest Corporate Bonds Show Federal Reserve Has Room for Hikes
- Stocks are volatile, but junkiest junk bonds show little worry
- Fed may see green light for front-loading rate hikes
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January saw a lot of equity-market volatility. But February may allow markets to calm. If you look at yields for the lower-rated high-yield bonds, there is little reason for concern. Credit may take on greater importance as the Federal Reserve assesses financial conditions, and that makes the next three Fed rate hikes a lock.
Yields for Caa bonds, a canary in the coal-mine for credit conditions, bottomed in July and have been rising since the Fed began normalizing policy. But the recent rise is dwarfed by twin peaks of stress in high yield over the last seven years. In fact, Caa yields today are actually lower than at any time before late 2020 except brief periods in 2013 and 2014 during the shale boom.