Junk bonds, or those high-yield bonds which are under BBB- at S&P or under Baa3 at Moody’s, have seen one massive rally since the lows of the summer.  Some may wonder if these have now rallied too far.  With Treasury yields being so low investors have been reaching out more and more in recent weeks into almost anything that will pay 5%, 6%, 7% or higher.

Standard & Poor’s tracks bond spreads each day and it has noted almost each day that these speculative spreads have now tightened to just over 650 basis points over Treasuries.  We would note that these spreads went under 600 basis points back in March, but they reached a high spread of roughly 720 basis points during the dog days of early June.

The latest spread tightening was by 8 basis points, broken down as follows: ‘BB’ spread tightened by 8 bps to 443 bps, the ‘B’ spread tightened by 7 bps to 688 bps, and the ‘CCC’ spread tightened by 8 bps to 1,070 bps.

The SPDR Barclays Capital High Yield Bond (NYSEMKT: JNK) is barely 1% off of a year high at $39.76 and its last dividend payment on an annualized basis would be about 6.9%. The iShares iBoxx $ High Yield Corporate Bond (NYSEMKT: HYG) ETF is priced at $91.60 and is within 1% of a year high.  Its last dividend payment would be representative of a yield of 6.6%. We would note that those implied yields are not as exact as equities with set dividends because the monthly payments fluctuate.

A popular closed-end mutual fund called the BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) trades at $13.18 and is within 2% of a year-high, but its implied dividend is almost 8.2%.

JON C. OGG

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