The Pain in Junk Bonds

The junk bond market has been getting clobbered recently. The chart below shows the recent plunge in the Junk Bond ETF ($HYG) The sell-off is partly a spillover from lower oil prices since many energy companies have floated low-rated bonds. Last week was the worst week for junk bonds in three years.

The weakness in junk isn’t necessarily a harbinger of bad times, but it’s an important development. It’s basically a broad reassessment of risk. Investors are now demanding a greater premium to own riskier bonds.

For an economy to show a broad recovery, I would expect to see marginal borrowers do well, but that’s not a given. The WSJ notes that, “Junk bonds now trade at a yield of 5.28 percentage points above yields of comparable U.S. Treasurys, up from 3.23 points at their June low for the year.”

Posted by Eddy Elfenbein on December 15th, 2014 at 11:02 am

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