The Wall Street Journal – Junk Bonds Get Closer Look
The selloff in junk bonds has investors on a tightrope. Like other risky assets, debt issued by “junk”-rated companies has been pummeled by the market turmoil sparked by the indecisive elections in Greece in early May, with prices falling and yields rising. Market participants, though, are homing in on how much more junk bonds are yielding than Treasurys, which have been a big beneficiary of market jitters. That difference in yields widened to 7.31 percentage points on Monday, marking the biggest gap since the start of the year, according to Barclays .Such a big premium in yields presents bond investors with a conundrum. Although the widening premium is a clear signal of investor nervousness, it also indicates junk bonds are looking cheap. Some investors say they are getting a sense of deja vu: If worries about Europe die down again, then junk bonds could stage a comeback much like they did in the first quarter. And so far, junk bonds are holding their ground. Total returns fell less than stocks in May, losing 1.26% compared with a 6% decline in the Standard & Poor’s 500-stock index. Year to date, junk bonds have handed investors a return of 4.33%, while stocks returned 2.2%.
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Source: Bianco Research