Yield spreads have widened again to over 500 basis points, comparable with junk bonds.
Yield spreads of junk bonds over Treasuries have narrowed a touch, though they remain wide.
There is a close correlation between yield spreads and credit default swap prices.
Bond yield spreads in Europe are at record levels this week, which underscores the serious nature of the Greek debt issue.
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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.
Bond yield spreads in Europe are at record levels this week, which underscores the very serious nature of the Greek debt issue.
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Bond traders are showing signs of increased risk aversion as yield spreads have widened and debt is harder to finance for some companies.
Also positive: Yield spreads decreased in December and January, meaning that investors have more faith in the ability of U.S. companies to pay back debt.
Cohanzick believes that high yield spreads are currently priced to produce 170% greater after-tax yields versus 10 year TSYs after adjusting for future default losses and taxes.
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We continue to overweight markets where credit spreads (sovereign yield spreads or CDS spreads) have declined relative to their two-year averages and where valuation ratios are cheap, including Germany, Austria, Italy, Portugal, and France.
Yield spreads between Greek and German ten-year government bonds (the European benchmark) widened to 252 basis points on Wednesday, while the Athens Composite Shares index fell by 2.4% in afternoon trading, with Greek banks some of the biggest decliners.
We found that when earnings yield spreads during the prior five years averaged more than two standard deviations above the average, investors on average earned (annualized) returns on stocks of 21.3% for the following year, 17% for the next two years, 14.6% for the next three years and 8.3% over five years.
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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For one, liquidity remains strong in the corporate bond market, as spreads in both high yield and high grade corporates have remained relatively tight.
Bond traders thrive on playing the spreads between existing securities of comparable yield and maturity and the forthcoming issues.
On the other hand, Matt is avoiding a smaller segment of the high yield market consisting of riskier CCC bonds with spreads below their historical levels.
The other metric that we follow very closely is credit spreads, and this is the difference between the yield between the sub-investment-grade bonds and the ten-year Treasuries, where the recent monthly returns in the stock market is favorable, when credit spreads are normal, compared to when spreads are very wide.
The credit spread simply measures how much more high yield bonds yield than treasuries of similar maturities (read more on the basics of credit spreads here).
These large cap stocks have dividend yields greater than the average yield on 10-year corporate paper, and 5-year credit default swap spreads tighter than that of 5-year U.S. debt.
Bond spreads are always higher on riskier debt because bond holders are being compensated through yield for future losses that may be incurred in a debt default.
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And so corporate bond spreads are widening--meaning, corporate IOUs have to show more of a yield premium over Treasurys to attract buyers.
Savings and loan institutions, recent victims of the flat yield curve with huge redemptions in outstanding fixed-mortgage paper, will be able to operate at wider spreads.
When the happy day dawns that spreads narrow, you will enjoy a price appreciation, and meantime you will be earning a nice yield.
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