Yield on US Junk Bonds Drops Below 5%

US junk bond yields have fallen below 5% for the first time, as investors prioritise securing the biggest return possible and relegate concerns over the outlook for the economy.

Earlier this week the Barclays US Corporate High Yield index fell to a record low of 4.97%, the first time that the benchmark tracking debt issued by weaker US companies has fallen below the 5% level in its 30-year history and edged lower to 4.96% a day later. The yield on the index has lost more than a percentage point since the start of 2013, in a sign of strong demand for income-producing securities.

Strong investor demand has been accompanied by major bond purchases by central banks in an effort to bolster an uncertain global economy.

However, analysts at Bank of America Merrill Lynch (BofA Merrill) report that a survey of investors found increasing concerns that the rush into high-yield is driving down yields without a corresponding change in credit fundamentals or interest rates, which could be the symptoms of a classic investment bubble.

“There are increasing concerns about inflows leading to bubbles, mainly in high yield,” the analysts commented. “In fact, asset bubbles now rank as the number one concern on credit investors’ minds.”

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