Junk. Who wants some?
Americans, that’s who. We love junk. Zebra Cakes washed down with Mountain Dew. Or Apple Flips with Dr. Enuf. Who remembers Apple Flips? Did you know they were discontinued? Well, they were. And whoever made that decision in the Little Debbie boardroom should be fired. With no severance package.
Anyway, I wrote about junk tangentially over the weekend in “Corporate Inequality Revisited.” At the end of that article, I noted that high yield spreads in the US have rarely been tighter.
Now that data for Friday’s rally is available, I figured I may as well show you the chart. Or a chart.
So that’s just junk yields, and they’re the lowest since the Fed started hiking rates in Q1 of 2022.
Plainly, they’ve been lower historically. Remember, there are two components here: A risk-free rate and risk premia. The former’s still elevated, but what about the latter?
The figure below shows you spread compression versus the summer 2022 high yield wides.
The point, obviously, is that investors are demanding more than 300bps less in the way of compensation for the myriad risks that go along with sub-investment grade corporate credit than they were in July of 2022.
Is that justifiable? Well, frankly it’s not my call. Nor yours. This is the market’s estimation of an appropriate premium above and beyond the “riskless” (and I should probably bold those scare quotes to account for goings-on inside the Beltway) proposition that is US Treasurys. Who are we to question the collective wisdom of markets, which currently assess that high yield credit hasn’t been this safe since — drumroll — June of 2007, two months before BNP Paribas kicked off the GFC by freezing three of its asset backed security funds?
There’s some implicit foreboding there. I hope you picked up on it. “What could go wrong?” and such. That aside, credit’s still credit: Even when it’s of inferior quality, it includes an obligation. And low as they are by the standards of the last three years, all-in yields are competitive with benchmark US equities in 2025, if certainly not with the index’s best performers.
As Howard Marks put it this month, “narrow yield spreads mean today’s prospective returns on credit aren’t generous relative to those on ‘risk-free’ assets [but] the[y’re] significant in absolute terms and supported by the issuers’ contractual promise to pay interest and return principal, something that can’t be said for stocks.”
Not all junk is equal. As the US becomes more corrupt over time, some “junk” will likely be deemed too important to leave to the vagaries of the free market.
Cronyism will become more and more important in evaluating investment decisions.
Good luck to all.
Back when I cosplayed as a construction worker in my summer days, Zebra Cakes and Mountain Dew were staples in my lunch pail. They used to taste so good, but now that I’m a desk jockey, I can’t handle that much sugar and just feel terrible if I try to consume them.
@SeaTurtle, better late than never, but I finally installed new blinds. I can’t remember where you recommended, but I was able to get a 50% off deal and it was super easy to do the install myself. When I got a quote for someone else to do the job, they quoted me over $5k for eight windows! Doing it myself cost me $900 and a couple hours of labor. That seems to be the case for any home improvement job these days.
🙂
The link for SeaTurtle’s custom Chinese blinds: https://heisenbergreport.com/2024/10/17/the-end-of-yahya-sinwar/
Dang, now you’re giving me buyer’s regret.
I don’t believe it was intentional, which makes it even darker and funnier, but there is some kind of black humor at work when a post on Sinwar’s window-based termination is followed by one THR commenter asking another particularly helpful one for his recommendation on blinds. I missed the irony in the original pass, so am quite pleased history has recently repeated itself (see also, Doha) here. Thank you for bringing my attention back to this matter. I needed a good chuckle.
I don’t subscribe for this kind of thing, but consider it a real sanity-anchoring bonus.
Lol, I used to keep a bag ofcombos in my carpenters belt nail pouch. Highly recommend.