Gavekal Capital: US Bond Update: High Yield Bonds and Equities Still Haven't Converged and Corporate Yields At Historic Lows

Wednesday, April 8, 2015

US Bond Update: High Yield Bonds and Equities Still Haven't Converged and Corporate Yields At Historic Lows

The spread between junk bonds and 10-year treasury on 6/23/14 hit a very narrow 222 basis points. At that time, the S&P 500 was trading at 1962. Since then the junk bond spread widened to over 5% in December and currently stands at 415 basis points. The S&P 500 has continued to climb nearly 6% higher.

Junk bonds have also widened out against AAA corporate bonds. While the absolute difference between Junk and AAA spreads is tame (261 basis points), Junk bonds are nearly 125 basis points wider relative to AAA corporates than they were last June.

A lot of this has to do with the continuation of a 30+ year trend in AAA yields. AAA bond yields are basically at all-time lows. Same is true for BBB yields

Long-term municipal bond yields are pretty much at the lowest levels since the mid-1960s.

US 10-year treasury yields are only about 40 bps below all-time lows. Compared, to France and Italy, US yields look downright buoyant. 20-year and 30-year treasury yields are at all-time lows as well.

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