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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The notion that owning high-risk stocks will yield high returns over the long haul is a bedrock of modern finance.
For investors that maintain fixed income exposure, we continue to favor high yield over Treasuries.
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 conclusion seems to be that investors are not being paid well at present to take the incremental risk of high yield bonds over Treasuries.
The high yield market rose over 4 percent during October, returning more than the stock market year to date.
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.
The other requirement for steady performance is that the credit markets remain open, enabling high-yield companies to roll over maturing debt.
Even junk issues have been inhaled by investors desperate for any yield pick-up over puny Treasury and high-grade bond yields.
Nevertheless, Fidelity has been "substantially" adding emerging-market debt, especially Asian high-yield securities, to its holdings over the past 12 months.
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.
But there is no guarantee high yield stocks will outperform their lower yielding counterparts over the long-term.
Just as in the past, high yield bonds trade at an interest rate spread over Treasury bonds, which are more liquid and less subject to default risk.
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.
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).
For high-yield bonds, this is often calculated at 50 bps over the benchmark rate.
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High yield bonds and senior floating rate loans have performed quite well over the past four years.
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The high yield bond market gets my money with its 500 basis points spread over 10-year Treasuries.
Cost of carry on my bond portfolio of high yield paper is also minimal, but shows a net positive variance of over 500 basis points.
Over the last 12 months, the yield on 10 year Mexican debt has gone from a high of 6.4 percent to around 5.09 percent currently.
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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.
High yield bond spreads soared in 2008 by more than 400% to more than 700 basis points over Treasurys before declining in 2009.
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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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