Expect the Junk Bond Bubble to Burst First

Mish

Bubble Bursting Order

When will the stock market bubble burst? 

I don't know, nor does anyone else. But I suspect the junk bond market is likely to go first.

Bloomberg reports U.S. Junk Bond Yields Hit Record Low as Vaccine Hope Fuels Rally

The average yield for the Bloomberg Barclays U.S. corporate high yield index plummeted to 4.56%, sinking below the previous record of 4.83% set in June 2014. The 45 basis point decline from Friday’s close was the steepest fall since April 9, when the Federal Reserve expanded its corporate bond purchases to include some junk debt.

Investors are still pouring money back into retail funds that buy junk-rated debt with an estimated inflow of $3.23 billion by Friday’s close, JPMorgan Chase & Co. analysts wrote in a note, citing Refinitiv Lipper. The cash influx was led by HYG, the biggest high yield exchange-traded fund, with net incoming cash of almost $1.9 billion. JNK, the second biggest ETF, raked in $511 million.

Observation

Vaccine news is hopeful, but long-term cash flows haven't suddenly jumped beyond where they were pre-SARS-CoV-2. This is easily the worst passive investment menu in U.S. history.

Reminder

Mish

Comments (37)
No. 1-19
Realist
Realist

The US economy is going nowhere as long as the pandemic remains out of control.

One-armed Economist
One-armed Economist

Yes, "pay-whatever" trend followers have compressed junk spread to nosebleed levels that have no allowance for inevitably rising default rates. I.e. oil shs spike and flail, but at the end of the day they are a long way from most shale producers' requisite financing cost needs.
Oil is/will be dead.

UrbanDigs
UrbanDigs

Yup, credit spreads came in bigly yesterday. Risk on in a big way. Wouldn't be surprised to see melt up talk play out. For anyone interested, I built a credit spread tool here at www.creditspreadalert.com. only cause the crazy stuff hasn't happened yet

Sechel
Sechel

I don't see it until the fed tightens or treasury yields rise

Zardoz
Zardoz

You can't tell here in SoCal.... freeway is jammed as ever. People are wearing masks, but they are definitely out and about, and cramming themselves into outdoor restaurant spaces.

Eddie_T
Eddie_T

So.....will the Fed save shitty corporate paper? I’d guess the answer to that is “yes!”.

Six000mileyear
Six000mileyear

Complete irrational exuberance.

SAKMAN
SAKMAN

I really have to wonder how the economy is actually doing when I cant buy anything that I want because nothing is in stock.

I mean I could buy them, but I'm not willing to pay a scalper.

Its very odd right now.

Casual_Observer
Casual_Observer

This is why so much money is flooding into tax free instruments.

Webej
Webej

Everything financial is a derivative of cash flow.
Cash flow isn't coming back soon in a whole slew of businesses and sectors.

Dodge Demon
Dodge Demon

The Fed will eat all the - - - - , don’t worry.

German stock market rode the Weimar wave up, too.

Mish
Mish

Editor

Out all day and dead tired.
Hiked the narrows today in Zion.
Nothing like hiking in ice water (literally - for those who understand the narrows hike) Had a wet suit on.
7:00 AM to 6:00PM
Posts were scheduled

bradw2k
bradw2k

Last time I took a nibble of SJB, three days later Powell announced a junk buying program.

Sechel
Sechel

wonder why corporate and not cmbs or clo's? a very convincing case coul be made for cmbs and clo's may be a more convincing one

Jeff Dog
Jeff Dog

I have a little of my mad money invested in junk bonds for the last few years. Despite the bubble and the relatively high yields I have not made much.


Global Economics

FEATURED
COMMUNITY