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Bob Carey
Chief Market Strategist
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  There Are Two Sides To Every Yield Spread
Posted Under: Bond Market
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View from the Observation Deck

  1. We did a blog post on 8/28/12 ("High Yield Corporate Bonds Popular With Investors Seeking Income") making the case for why high yield corporate bonds ("junk bonds") were not a "bubble" waiting to burst.
  2. While we noted in the first post that the average yield spread between the ML U.S. High Yield Master II and the 10-Year T-Note was 5.83% from 1990-2011 (using year-end data points), we focused more on returns.
  3. The concern today with high yield corporate bonds appears to be that their nominal yields are below 7.00%. BB-rated high yield corporate bonds actually yield less than 6.00%.
  4. "Historically, investors have demanded a yield on so-called junk of at least 7.00% to compensate for the added risk of lower-rated debt," according to Forbes. But we live in strange times.
  5. We suggest that investors place more of an emphasis on the yield spread than nominal yield, considering the fact that Treasury yields have lingered near historically low levels.
  6. The yield spread as of 10/29/12 (see chart) was 521 basis points. Historically speaking, high yield corporate bonds are not considered "rich" until the spread falls to the 300-350 basis point range.
Posted on Tuesday, October 30, 2012 @ 3:41 PM • Post Link Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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