Dividend and income oriented investors need to be on the lookout as of now as the formation of a bubble among the high dividend and high-yield stocks and funds appears to be peaking. The latest move from QE3 effectively forces investors into income producing investments as money market funds and Treasury bonds pay almost nothing now. There is some evidence that demand for high-yield and junk bonds may have already peaked or is nearing a peak if you merely follow the junk bond spreads.

The good news is that you don’t have to panic. Hopefully, at any rate. This high-yield and high dividend bubble will not likely burst like some other classic bubbles (i.e. the dot-com bubble of 2000). That being said, investors may still be taking on far more risk than they understand compared to traditional bond funds as this has become a very crowded trade now. The move into junk bonds and high dividends has been a trade that investment managers and savvy investors made back to early 2011, throughout 2011, and into 2012.

Can the move continue? Sure, but our take is that the easy money has been made and that the price action indicates that junk bond spreads may have gotten too tight over the last two weeks. We track the speculative composite spread almost each and every day and we have seen the composite index spreads widening even as some junk-bond issuers are scoring debt offerings at record-low yields.

S&P’s headline spread data showed that the speculative-grade composite spread reached a low of 589 basis points back on September 21 and that spread has risen by almost 30 basis points since then.

SPDR Barclays Capital High Yield Bond (NYSEMKT: JNK) is trading up 2-cents at $40.00 today against a 52-week range of $35.14 to $40.81. That high came on September 18 and shares have pulled back about 2% since. The implied yield of this very liquid ETF is about 6.6% as of today. The iShares iBoxx $ High Yield Corporate Bond (NYSEMKT: HYG) ETF is also liquid and its gain of $0.22 to $92.11 compares to a 52-week range of $80.73 to $94.04.

The Vanguard High Dividend Yield Index ETF (NYSEMKT: VYM) is up $0.18 at $50.78 against a 52-week range of $39.87 to $51.41. This ETF is down just over 1% from its high and the indicated yield is “only” 3.1% here as this is a high stock dividend fund rather than a high-yield bond fund.

The PIMCO High Income Fund (NYSE: PHK) is a closed-end fund and the $0.05 drop today to $14.12 compares to a 52-week range of $10.90 to $14.32. We would not that this has a monstrous premium to its net asset value due to leverage here. Still, the current dividend yield is indicated around 10.3%.

BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) is another fairly active high-yield bond fund and the $0.03 drop to $13.26 is against a 52-week range of $10.26 to $13.58. Its dividend is approximately 8.1%.

Here is how the tightening report dates have gone (headlines copied from Dow Jones over last 45 days):

• 10/02 S&P Speculative-Grade Composite Spread Expands to 618 Bps
• 10/01 S&P Speculative-Grade Composite Spread Expands to 617 Bps
• 09/28 S&P Speculative-Grade Composite Spread Expands To 615 Bps
• 09/27 S&P Speculative-Grade Composite Spread Widens To 609 Bps
• 09/26 S&P Speculative-Grade Composite Spread Widens To 600 Bps
• 09/24 S&P Speculative-Grade Composite Spread Widens To 593 Bps
• 09/21 S&P Speculative-Grade Composite Spread Narrows To 589 Bps
• 09/20 S&P Speculative-Grade Composite Spread Expands To 592 Bps
• 09/19 S&P Speculative-Grade Composite Spread Narrows To 591 Bps
• 09/18 S&P Speculative-Grade Composite Spread Contracts To 592 Bps
• 09/17 S&P Speculative-Grade Composite Spread Tightens To 600 Bps
• 09/14 S&P Speculative-Grade Composite Spread Tightens to 614 Bps
• 09/13 S&P Speculative-Grade Composite Spread Narrows To 615 Bps
• 09/12 S&P Speculative-Grade Composite Spread Narrows To 623 Bps
• 09/11 S&P Speculative-Grade Composite Spread Narrows To 627 Bps
• 09/10 S&P Speculative-Grade Composite Spread Narrows To 636 Bps
• 09/10 S&P Rpt: Distress Ratio And Spec-Grd Composite Sprd Remain Hgh
• 09/07 S&P Speculative-Grade Composite Spread Narrows To 638 Bps
• 09/06 S&P Speculative-Grade Composite Spread Remains Flat At 646 Bps
• 09/05 S&P Speculative-Grade Composite Spread Narrows To 646 Bps
• 09/04 S&P Speculative-Grade Composite Spread Widens To 649 Bps
• 08/31 S&P Speculative-Grade Composite Spread Widens To 644 Bps
• 08/30 S&P Speculative-Grade Composite Spread Narrows To 642 Bps
• 08/29 S&P Speculative-Grade Composite Spread Narrows To 643 Bps
• 08/27 S&P Speculative-Grade Composite Spread Narrows To 643 Bps
• 08/24 S&P Speculative-Grade Composite Spread Widens To 645 Bps
• 08/23 S&P Speculative-Grade Composite Spread Widens To 641 Bps
• 08/21 S&P Speculative-Grade Composite Spread Widens To 638 Bps
• 08/20 S&P Speculative-Grade Composite Spread Widens To 637 Bps
• 08/17 S&P Speculative-Grade Composite Spread Narrows To 635 Bps
• 08/16 S&P Speculative-Grade Composite Spread Narrows To 637 Bps
• 08/16 S&P Speculative-Grade Composite Spread Narrows To 645 Bps
• 08/14 S&P Speculative-Grade Composite Spread Widens To 649 Bps

Earlier in the summer these spreads had widened out to over 700 basis points.

JON C. OGG

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