The yield spread between Treasurys and junk bonds suggests that junk-bond investors aren't worried about recession.
Consider the narrow spread that exists currently between the yields on junk bonds and U.S. Treasurys of comparable maturities. This so-called junk spread is a sensitive measure of what junk-bond investors collectively believe is the additional risk they incur relative to investing in Treasurys. As you can see from the accompanying chart, this spread currently is well below its average since 1997 — indicating that junk-bond holders think the risk they face is below average.
You might object to my assertion that we should worry when the junk-bond market is not. The junk-bond market presumably is very efficient, which would mean that all publicly available information has been incorporated and discounted into current prices. Isn’t it dangerous to think we know more than the market does?In most cases I wouldn’t bet against the judgment of the market. But in this case, the low spread levels in the past were more often than not followed by higher ones, and vice versa.
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