Cracks are forming in the junk bond market as investors demand higher payouts for owning the market's riskiest debt. It isn't time to ditch high-yield bonds, but investors should pay attention to the warning signs.
High-yield bonds now yield 8.1%, up from 7.22% a month ago. The increase reflects a jump in yields across the curve as investors bake in more inflation from high energy prices and other pressures, including concern about the deficit — hitting nearly $2 trillion in the fiscal year that ended Sept. 30.
The high-yield market is also showing stress on the credit side with spreads recently widening to levels not seen since April, according the Federal Reserve Bank of St. Louis. Credit spreads are the difference in yield between the bonds and Treasurys of similar maturities. Wider spreads mean investors are demanding higher yields for holding corporate debt, viewing it as riskier.
Spreads are at 315 basis points in the overall high-yield market, higher than a year ago but still below levels in March when they reached 346 bps. One basis point equals one one-hundredth of a percent, or 0.01%.
The high-yield market consists of bonds rated BB+ by S&P and Fitch and Ba1 and under by Moody's. The lowest-rated cohort, CCC and below, has seen the most movement with spreads climbing dramatically over the past year to roughly 1,250 bps.