The risk-off bias in junk bonds is taking a toll on prices these days. The byproduct: a rising and relatively elevated yield premium. The BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread increased to 6.83% on Friday (Oct. 2)—a three-year high and nearly double the level from mid-2014. That’s still low in comparison with the nose-bleed heights reached during the Great Recession, when spreads briefly soared above the 20% mark. In context with the relative calm of the last several years, the recent rise is still striking. The catalyst? The crowd’s demanding a bigger discount when it comes to estimating the potential for macro trouble.
Junk yield spreads are looking relatively attractive these days, but they may become even more attractive in the weeks (months?) to come. Indeed, JNK’s technical profile still looks ugly. The ETF closed last week at well below its 50- and 200-day moving averages and the 50-day average is well under its 200-day counterpart—and the gap has been widening lately.
Turning to the trailing one-return summary adjusts JNK’s loss to something approximating a middling decline. The prize for the deepest slide for the trailing 252-trading days through Oct. 2 still goes to a broad-based definition of commodities. The iPath Bloomberg Commodity ETN (DJP) is in the hole by nearly 30% for past year. By that standard, JNK’s 6.6% one-year decline through last week looks mild.