Junk Bonds Are Being Priced for Nirvana
The narrowing of the difference between yields on investment-grade debt and junk bonds doesn’t bode well.
Don’t fright the Fed.
Photo: Bloomberg
It’s tricky being a high-yield debt investor when there’s nothing to buy with a high yield. The definition needs revising. The consequences of getting such meager returns on junk bonds is that the margin for error for discerning investment managers is vanishingly thin. You’re meant to be rewarded for investing in riskier companies, but this isn’t happening right now.
Fortunately, central bank largess means corporate defaults haven’t really increased during the pandemic, and are even forecast to fall. But bond buyers are recovering less of their investment from companies that have collapsed. They need to place their bets with more care.