An Honest Take on Difficult Circumstances

When bond yields first went negative, I called a long-time confidante.  I whispered into the phone, “Someone is paying someone to borrow their money?  That makes no sense.” 

Over the next few days, weeks, and months, many articles would be published trying to make sense of negative interest rates.  It turns out many folks were confused by this.  For the record, we still find it amazing that people are paying someone to borrow their money. But, we suppose that is a rant for another day.

James Mackintosh recently wrote a refreshingly honest appraisal of debt markets in the Wall Street Journal.  His piece is a brilliant attempt to reconcile “the weirdness” in Treasury markets today.  We loved the honesty.  Even a brilliant veteran financial journalist like Mr. Mackintosh finds today’s markets bizarre.

We agree that markets are confusing today. The chart below is our reproduction of a “side” chart halfway down Mr. Mackintosh’s article showing Junk Bond spreads coming off record lows.

We found the chart jarring.  We’ve all read that real yields on junk bonds are now negative

Indulge us in some technical analysis.  Would you rather be “long” or “short” the line below?

After Exploding to 10 High Yield Junk Bond Spreads are Bouncing off Record Lows

Risk Scorecards: Spreads in High Yield are Flashing Red

Pretend we are giving you an eye exam.   Look at Figure 1 above again.  Short or long?  Look at the chart below.  How about now?

Being “long” that line means you think the days of covenant-lite junk debt combined with the lowest spreads in history will end badly.  If you think otherwise, we encourage a read of The Economist’s fantastic article, The Junk Heap: America’s high-yield debt is on ever-shakier foundations.

That is quite the chart in our view.  We are talking about spreads coming off 35-year lows.  And this, when underlying bond yields themselves just plummeted amidst soaring inflation numbers.

For those who want to make money when that line rises, this article is for you.  For those of you long high yield credit ETFs, we encourage caution!!

High Yield Spreads are Coming Off Record Lows

Our key point is as follows:

We have published a summary of

[1] Hat tip to the Grant Williams podcast with George Noble for the term

[2] Carvana, 10K, pages 16-20


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