By Mike Dickson, Ph.D.
Lowest spreads in nearly three years
Want more evidence that the U.S. economy is in good shape? Just take a look at the junk bond market.
The spread between risky high-yield (or junk) corporate bonds and “safe” U.S. Treasuries has fallen to just 2.84 percentage points, as seen in the chart below. That’s the smallest spread since late 2021 and nearly a full percentage point lower than where it was in early August when there was labor market weakness and heightened recession fears.
High-Yield Bond Spreads Hit a Nearly Three-Year Low
Here’s why that matters: When high-yield bond investors demand yields that are only slightly higher than the yield on comparable Treasuries, investors may see an economic environment with a low risk of corporate bond defaults. Given the string of positive news about the economy lately — strong consumer spending, robust GDP growth, and a surprising number of new jobs created — it makes sense that high-yield bonds have rallied this year (up 7.8% versus 3.4% for the bond market overall*). What’s more, high-yield bonds’ relatively short durations have helped the asset class avoid some of the recent volatility in the bond market.
- As of Oct. 4, 2024
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This is not a recommendation to buy or sell any security or to adopt a particular investment strategy. High yield bonds are not suitable for all investors and carry additional risks. High yield bonds are by nature considered riskier than investment grade and corporate bonds. They may not perform as intended and could expose investors to losses, e.g., the potential for default, to which they would not have otherwise been exposed. All investing involves risk. Investors may lose money.
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Information obtained from third-party sources is believed to be reliable but has not been vetted by the firm or its personnel.
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