Credit spreads are narrowing: Should you buy high yield bonds?

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With high yield spreads historically tight and prices close to all-time highs, some market watchers are wondering whether it’s time to jump off the high-yield bandwagon. Russ weighs in and explains why this asset class is still worth holding.

As a number of market watchers have pointed out recently, high yield doesn’t look so junky anymore.

High yield spreads are historically tight, at levels not seen since the fall of 2007, meaning there’s currently a much smaller difference in yield between a high yield bond and a comparable Treasury. At the same time, some high yield prices have reached all-time highs. In other words, investors aren’t being rewarded that much for holding high yield, traditionally viewed as a risky asset class.

Market Realist – The graph above compares yields of the ten-year Treasuries (IEF) and high yield corporate bonds (JNK)(HYG). The difference between the two has been diminishing since the peak of the financial (XLF) crisis.

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The yield for ten-year Treasuries stands at 2.3%, whereas high yield bonds are returning close to 6%. This means the spread is around 370 basis points, compared to slightly above 1800 basis points during the crisis. Treasuries (TLT) are considered very safe because they’re backed by the US Government. That’s why they command a premium, and also why they trade at lower yields.

Although credit spreads have narrowed by a record amount, you may still consider buying high yield bonds. The next few parts of this series explain why.

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