Back in December, we penned a brief piece on the rapid rise of low-quality bond yields – the price was dropping out of the things, and it made a very impressive rocket-ship looking graph.
Turns out, we were early on that trend – the last 6 weeks have seen the spread move further up and to the right. To wit, here’s the Bank of America Merrill Lynch CCC- Effective Yield chart through January 20:
A Flight to Quality
One of the more important reasons to track high yield bonds isn’t to look for an attractive entry point – I’d argue (and who’d disagree at this point?) that it’s still too early to make a move into a high yield fund. No, dear reader, it’s important to track below investment grade bonds to get a bead on what your fellow investors are thinking. If the spread between low quality corporates and high quality corporates is rising, that indicates fear in the market as people reduce the amount of risk in their portfolios and shift to higher quality – and higher rated – assets.
So, let’s do that now.
Here’s the graph of the spread between yields on AAA corporates and CCC and Below corporates, in all of its glory (courtesy Bank of America Merrill Lynch’s indices):
(You can find the data on the Federal Reserve Bank of St. Louis’s FRED here)
Now, obviously, it’s hard to eyeball the total return on securities from a chart, so we built 3 calculators to do the math for you (including for that CCC- chart there):
- AAA, AA, A-rated Bond Return Calculator
- BBB, BB, B-rated Bond Return Calculator
- CCC and Below rated Bond Return Calculator
Quick math on the timeframe in the chart: from January 20, 2012 to January 20, 2016 CCC and below rated bonds would have returned 6.917% total.
Your Investment Move?
Eventually, risk is priced at a level that just doesn’t make sense – but I’m not sure it’s there yet. Your moves are probably:
- HYG, the High-Yield corporate bond ETF fund from Barclays
(or if you agree it’s too early but want a corporate debt ETF)
- LQD, from iShares, on the Investment-Grade corporate bond front
(Disclosure: I own neither).
But hit me with your best investment hypothesis.
Or, you know, tell me the best way to pay no attention to the market and come back in a couple months. Your call.