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Why Stock-Market Investors Should be Worried About the Junk-Bond Market
Watch for a widening of the spread between junk bonds and Treasurys
This spread, sometimes referred to as the high-yield (or junk) spread, is currently in the vicinity of 3.5 percentage points (as judged by the BofA Merrill US High Yield Option-Adjusted Spread). That means that junk-bond investors on average are requiring that they be paid a yield of just 3.5 percentage points more than if they had instead invested in Treasurys of the same maturities.
The average high-yield spread over the last 20 years has been 5.7 percentage points. And it often spells economic trouble when the spread drops to levels in the vicinity of where it stands today.