Does this mean that high yield bonds are over-valued? (likely), that Treasury bonds are over-valued, since high yield bonds are priced as a spread above Treasuries? (very likely), and that high quality stocks in a universe of mostly overvalued liquid assets are relatively cheap? (likely).
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Despite the rather dour comments from Lockhart, the tide appears to be shifting in the corporate bond market as liquidity has begun to return and both investment-grade and high-yield premiums over Treasury yields have begun to narrow in recent sessions.
The problem is that the high-dividend-yield space has seen consistently high net inflows over the past year and investors have paid the price of that popularity.
JPMorgan Chase's debt-market stress tests foresaw a 40% increase in corporate spreads, but high-yield spreads in 2007-09 increased many times over.
The other requirement for steady performance is that the credit markets remain open, enabling high-yield companies to roll over maturing debt.
The sheer volume of high-yield debt is causing spreads over Treasuries to soar.
As for breaking the calendar-year record, that appeared an eventuality given the frenetic pace of issuance over the past three months, but recall that high-yield supply at midyear was actually 4% lower than the comparable period a year ago.
Nevertheless, Fidelity has been "substantially" adding emerging-market debt, especially Asian high-yield securities, to its holdings over the past 12 months.
The notion that owning high-risk stocks will yield high returns over the long haul is a bedrock of modern finance.
Even junk issues have been inhaled by investors desperate for any yield pick-up over puny Treasury and high-grade bond yields.
But there is no guarantee high yield stocks will outperform their lower yielding counterparts over the long-term.
For high-yield bonds, this is often calculated at 50 bps over the benchmark rate.
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Chart Analysis : The weekly chart of the ten-year T-Note yield ( TNX) shows the high in yield at over 5% in early July 2007.
The high yield bond market gets my money with its 500 basis points spread over 10-year Treasuries.
And this chart does not reflect the influence of the high-yield market, which delivered a double-barreled boost to the loan market over the last three months.
Shares of JNK have a positive edge in the short-term of just over three quarters of a percent, significantly higher than its rival, high yield bond ETF, the iBoxx High Yield Corporate Bond Fund (NYSE: HYG).
Credit spreads tightened considerably over the five-year period and active managers were not able to keep up with these actions in the high-yield marketplace.
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