Courtesy of Pam Martens.
Ignore this past week’s trading in the junk bond market at your own peril.
On May 7 and May 8 of this year, junk bonds fell to record low yields of 4.97 and 4.96 percent, respectively, according to the Barclays U.S. Corporate High Yield Index. (Wall Street prefers the misleading title of “High Yield” to peddle its junk bond wares.) Back in 2008, junk bond yields were trading as high as 19 percent. (Junk bonds are those rated below Baa3 by Moody’s and below BBB- by Standard & Poor’s.)
In the last two weeks, junk bond prices have been selling off as everyone from small investors, pension funds, insurance companies and mutual fund portfolio managers reassess the amount of bond support that will be coming from the Federal Reserve in the future. While prices of Treasury bonds and investment grade corporate bonds have also sold off, there has been a notable deterioration in the junk bond area, with a particularly sharp sell off earlier this week.
According to Lipper, there was a massive net outflow of $880 million for the 7-day period ending May 29 from mutual funds and ETFs (exchange-traded funds) invested in junk bonds.
Bond investors were glued to the testimony of Federal Reserve Chairman, Ben Bernanke, on May 22 before the Joint Economic Committee of Congress. While Bernanke downplayed a rebound in the jobs picture, he also raised questions as to just when the Federal Reserve would stop supporting the overall bond market with its $85 billion monthly purchases. Currently, the Federal Open Market Committee (FOMC) of the Fed is keeping yields low by purchasing $45 billion per month in long-term U.S. Treasury securities and $40 billion per month in mortgage-backed securities (MBS). Since junk bonds trade as a yield spread to Treasuries, any back up in Treasury yields will impact a decline in prices of junk bonds and a rise in yield. (In Wall Street lingo, bond prices move inversely to yield.)
This is what Bernanke had to say on the jobs front and the bond-buying program:
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