Junk bonds had a rough ride late last year and earlier this year, but have since put in outstanding performance as the panic faded and a more benign environment set in. The question of course now is whether it has gone too far. This article examines the outlook for junk bonds from a couple of angles and concludes that caution is warranted for those seeking yield in this space.
Credit spreads
The first point to note is the rundown in credit spreads since the worst point in February this year. February was the bottom in a lot of risk assets, with a couple of forces sparking a turnaround. The pause in the US dollar bull market, the rebound in commodities, a stepping up of stimulus (China, Japan, and particularly - the ECB), were all contributing factors.
The ECB aspect is in particular important as the ECB is now buying corporate…