Bond investors are buying risk.
Treasury-bond prices are closing out 2013 near their low of the year. But the junk-bond market is going in the opposite direction.
The iShares iBoxx High Yield Corporate Bond Fund (HYG) closed last Friday near its highest price of the year.
Take a look…
HYG invests mostly in corporate bonds rated BB and lower. That’s the so-called “junk” bond category. These bonds carry a higher risk of default. So they tend to pay a higher interest rate to compensate investors for that risk.
In other words, investors are selling the safe stuff, and they’re taking on risk.
We’re at the point now where the premium of long-term Treasury bonds over junk bonds is as low as it was back when the stock market peaked in 2007, and just before a major correction in 2011.
Here’s a chart showing the price relationship between the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and HYG…
On average, TLT trades at about a 40% premium to HYG. In times of excessive risk aversion – when investors are looking for the safest investments possible, like during the financial panic of late 2008, TLT will trade at a much higher premium.
When investors are comfortable, though, it’s a different story. The Treasury-bond premium to HYG nearly evaporates.
Right now, TLT trades at a mere 10% premium to its junk bond counterpart. When you combine that with the historically low level of the Volatility Index and the record-breaking level of margin debt, it’s clear investors have developed a renewed appetite for risk.
But as we saw in 2007 and in 2011, that’s not a good thing.
Best regards and good trading,
Jeff Clark
[ad#stansberry-ps]Source: The Growth Stock Wire
