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In the week that ended on Wednesday, nearly $1bn was withdrawn from US funds that hold high-yield corporate bonds (junk bonds), according to Lipper FMI – the largest outflow in almost four and a half years.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