Junk Bond Yields Fall To Lowest Level In History

The extreme investor optimism rampant as we near the end of 2020 is reflected in many market measures, not least that the yields on U.S. junk bonds have fallen to historic lows (chart below).

Bullish sentiment, combined with a seemingly insatiable appetite for income products, have made investors relatively indifferent to risk, reducing the yields demanded to compensate for the increased credit risk inherent in “junk.” Indeed, the credit risk inherent in the high yield index has grown over time as the credit rating of many components have been downgraded.

Junk bonds are currently priced for little, or no, room for disappointment with consensus expectations of an economic recovery. This lack of a margin of safety makes junk bonds a less than compelling risk/reward proposition.

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