Junk-Bond Rally May Be Hitting the Wall – Wall Street Journal – 02/18/11

The current 4.4-percentage-point average difference, or spread, between high-yield bonds and comparable Treasury debt is still roughly twice as wide as it was in 2007, prior to the financial crisis.

Meanwhile, with corporate balance sheets in good shape and the economy gradually rebounding, the 3% default rate on high-yield debt as of January remains well below the historical average of 4% to 5%.

And the rate is expected to fall to below 2% by year-end, according to Moody’s Capital Markets.

The average junk bond yield has fallen to 6.837%, according to Merrill Lynch’s high yield index, slipping under the previous low of 6.863% in December 2004.

The average junk bond now trades at 103.89 cents for every dollar of face value, according to the Merrill Lynch High Yield Master II index.

The bonds now yield 4.54 percentage points more than comparable Treasury bonds, down from 6.22 percentage points in early December, according to the Merrill index.

Many note that risk premiums are near their historic average of roughly 5 percentage points above Treasurys and far from their low of 2.41 percentage points reached in May 2007.

When yields hit their low point in 2004, risk premiums measured 3.1 percentage points.

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