Quick Bites | Even Junk Bonds are Rallying - Clime Investment Management

The premium that US investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasuries has shrunk to near pandemic-era lows. This is a sign of dwindling worries about an economic slowdown that would cause a big jump in defaults and bankruptcies. In other words, if the US economy is approaching a recession, no one told the junk-bond market.

Low-rated debt has been included in a broad market rally fuelled by signs of cooling inflation and hopes for interest-rate cuts. Attracted by yields around 8%, investors have added a net $3.7 billion into junk-bond funds so far this year, the first inflows in that period since 2020.

Source: Wall Street Journal

Analysts closely watch junk bonds because companies with weaker credit ratings tend to be hit by economic problems first: they are like the canary in the coal mine. Strong demand for junk bonds implies that the economy will cool enough for rates to come down, without sliding into a recession. Markets continue to believe that there will be a soft landing, and many companies are taking advantage of investors’ demand to refinance existing debt.

Source: Wall Street Journal

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Quick Bites | Even Junk Bonds are Rallying

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