Junk Bond Spreads Widening: A Canary in the Coal Mine?

As readers no doubt know all too well, the market premium versus safer ones contracts in robust times and widens in downturns. And since credit markets typically signal downturns months before the equity markets, junk bonds are one place to look for advance warnings of changes in economic fortunes (albeit with a risk of false positives).

The Financial Times reports (hat tip reader Joe C) that sovereign debt worries are leading investors to exit junk bonds at a particularly rapid clip:

Investors are selling out of “junk” bonds at the fastest rate since September 2005, in the latest indication that concerns over sovereign debt are spreading to other credit markets.

In the week that ended on Wednesday, nearly $1bn was withdrawn from US funds that hold high-yield corporate bonds (junk bonds), according to Lipper FMI – the largest outflow in almost four and a half years.

As a result, the past month has seen the biggest sell-off of US junk bonds since the equity market bottomed out in March 2009, said Martin Fridson, chief executive of Fridson Investment Advisors, which specialises in high-yield bonds.

Spreads – the difference between the yields on junk bonds compared with US Treasury bonds – have widened by more than 100 basis points since January 11, and now stand at about 700 basis points, as measured by the Bank of America Merrill Lynch Index.

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  1. John

    I find it quite ironic that the U.S. government continues to put its full support behind Goldman Sachs given that Goldman is clearly a terrorist organization hell bent on destabilizing economies around the world.

    How can they be allowed to continue to operate? Goldman has done way more economic destruction than 9/11 ever did. Goldman’s evil actions have also done more to make the entire world less safe for everyone than 9/11 ever did. And yet, there’s the President of the U.S. telling every one what a savvy business man his good friend Blankfein is.

    The Obama critics have been saying for a while that Obama is a friend to terrorists and now it’s clear that Obama is a big-time supporter and friend of the terrorists at Goldman.

  2. lily

    Because Goldman sachs IS america. They own both parties through lobbying arm. Rmember how NY gov. hooker scandal? My suspicion, somebody was running his banking record and digging dirt and found something.

    That last MA. senate run? Guess who paid the last minute donation surge.

    Noone is going to do anything in DC. everybody knows they own the town. And they gonna run rampage with so much hot money on hand (watch last few days price fluctuation on everything, specially those poor saps in europe. That is the amount of money sloshing around burning everybody.)

    And this will ultimately come back and crash US banking system again. Maybe it’s time to buy Yen bond, specially if china decide to terminate US money supply.

  3. DoctoRx

    Not sure there is much predictive value in these sorts of market moves.

    The Chicago Fed Natl Activity Index has not confirmed the end of recessionary economic trends. Maybe the junk bond market just got too frothy. With gold and stocks having sold off, junk bonds would be expected to move with them.

  4. K Ackermann

    And then there was last week’s treasury auction that had some very unusual characteristics, and some say was nearly a failed auction.

    Watch the bond markets!

  5. scraping_by

    Well, maybe about that sovereign debt thing.

    The money might be flowing out of corporate junk bonds because of the perception that corporations aren’t going to do too well in the future. We’re talking about anyone who depends on consumer spending (particularly American consumers) who will probably follow the long, sad drift down of the general standard of living. The “positive trend in corporate fundamentals” is certainly more a matter of appearances than realities, and the Potemkin Recovery will fall off the table sooner or later. Bond traders appear to be betting on sooner.

    Some portfolio theories equate sovereign debt and junk bonds. This is off the wall, since the risk is provably not connected. Chasing money out of the one shouldn’t affect the other. The only connection might be a general fall of the money supply, and these are both the first tier of risk to be dropped. No one then another.

    Once again, economists confuse coincidence with causation.

    1. NotTimothyGeithner

      “Once again, economists confuse coincidence with causation.”

      This reminds me of GE suits. They acted like they were Thomas Edison because they ran GE, but they never really seemed to understand that GE was GE before they even started working there. My view on economists is that they think they are Harry Seldons, have no understanding of history, and have no idea who Harry Seldon is.

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