Bond Prices Have Traders in a Funk
As 10-year treasury bonds cross the important 4% yield, high yield debt is still in vogue. Ford, perhaps one of the riskiest borrowers of them all, dumped $1.75 billion in 5 year debt. And believe it or not, the company earned the lowest interest rate yet at 7%.
Junk Bonds are on a Roll!
Junk debt has been on a roll, with the broadest based measures showing lower interest costs and higher prices for 14 months straight. The rally is especially interesting considering once “safe” bonds are now treading lower as investors fear the government’s inability to service its debt.
Spread Disappears
The important measure of the spread between investment grade corporate debt and government backed issues is at its lowest since 2007 at 146 basis points. That is, investors demand just 1.46% more for corporate debt than similar maturity government debt, showing that they’re more willing to lend to sustainable businesses than a bloated government.
The Next Test
The next test for the bond market is to see how junk bonds price in rate increases by the Federal Reserve. Should junk bonds shift to a lesser degree than the change in the interest rate, we’ll know that investors aren’t just rate shopping but instead looking for more credit worthy borrowers. In the most recent sale, Ford is rated B1, well below investment grade. (Four steps below, to be exact.)
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