Junk Bond Bubble in Six Images

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by Mish Shedlock, The Maven:

The junk bond to BBB-rated bond spread and the spread between AAA to BBB bonds shows amazing complacency. It won’t last.

Fallen Angels

BBB-rated bonds are just one notch above junk (also called high-yield).

Fallen angels are bonds that slip from BBB to junk.

The lead chart shows what happens to “fallen angels” during recessions. All the investment grade bond funds have to dump the fallen angels straight into illiquid markets with few takers.

Half of the corporate bond universe is BBB-rated.

Fallen Angels vs BBB Yield

I created the BBB to Junk spread chart by subtracting the BBB yield from the High Yield yield.

BBB vs AAA Yield

BBB to AAA Yield Spread

Investors’ Curious Comfort With Junk Bonds

The Wall Street Journal comments on Investors’ Curious Comfort With Junk Bonds

The above image is from the WSJ. It only went back to 2016 so I created the top four charts in Fred to better show what’s really going on.

As Treasury yields rise, corporate bonds are getting whipped by the storm. But there’s still a danger investors aren’t getting paid enough for the risks they are taking.

A close look at U.S. bond markets reveals little evidence of a systemic flight from risk amid last week’s auctions. Yields haven’t yet risen much compared with recent years even as investors have withdrawn billions from corporate-bond funds.

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