Junk bonds are showing signs of liquidity strains as the S&P 500 heads into bear market territory
Concerns about the U.S. economy slipping into a recession isn’t the only thing nagging at corporate bond investors.
Trading in the riskier high-yield, or “junk-bond,” segment of corporate debt also has become a lot trickier in recent weeks, including as investors flee bond funds and the S&P 500 index SPX teeters on officially entering another bear market.With trading activity serving as a key engine of functioning financial markets, big intraday gaps, in terms of where investors are willing to buy or sell bonds, can matter a lot, particularly as fears rise and liquidity drains from markets.
To that end, Goldman Sachs analysts analyzed the divergence between where buyers and sellers have been willing to transact in the U.S. junk-bond market over time. They found recent high-low intraday swings, or the “bid-ask spread,” nearing levels last seen amid in the wake of the March 2020 pandemic panic, in a weekly client note.
Until May, most of the negative performance was attributed to rates volatility, with the 10-year Treasury rate TMUBMUSD10Y topping 3.2% earlier this month, nearing a peak level last seen in 2018, or before the 2020 pandemic recession hit.
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