Everyone's Talking About How Junk Bonds Are In A Bubble
After two big stock market crashes within a decade of each other, investors and stock market observers have been eager to find the next financial bubble.
Enter high-yield bonds.
Dave Lutz at JonesTrading noted that recent client and investor surveys from Bloomberg and Bank of America Merrill Lynch indicate that 70% of those surveyed said the rally in high-yield bonds is in a bubble or close to one.
High-yield bonds, also known as "junk" bonds, are bonds that receive a 'BB' or lower rating from S&P or a 'Ba' or lower rating from Moody's, are bonds issued by companies, municipalities, or governments that are deemed to contain substantial risk of default.
With the Federal Reserve keeping interest rates near zero and inflation running below 2%, bond yields have remained low while stocks have rallied.
In the "search for yield," investors have turned to lower-rated bonds, which offer a higher yield than government or investment-grade corporate bonds, to get returns.
As part of Business Insider's latest Most Important Charts In The World feature, Dave Lutz at JonesTrading highlighted the relationship between the S&P 500 and the high-yield bond exchange-traded fund, and the growing concern around junk bonds.
The S&P 500 an the high-yield ETF had been moving in lockstep over the last six months, but recently have diverged, with the HYG tumbling while the S&P pushed to record highs.
Is the bubble bursting? Or is this just an orderly correction?
