Why is no one talking about Junk Bond spreads?

In our last post on March 4th this year, we discussed a number of important points as to why we had decided to take our fund to 90% cash. An article that with the passage of time, in less than one-month in-fact (feels much longer than that), has aged incredibly well.

To make it clear, we did not forecast at all what has actually occurred. 2020 will go down in the history books already, and its truly concerning to think that we are still only at the beginning of all of this. Frightening even.

Our savior at the time when talk of the virus was still quite 'benign', was that everyone seemed to be guessing (nothing has changed to today mind you) as to the extent this virus could impact the world - which ranged from quite low in term of its impact, to severe, but with no-one in their right mind suggesting what has actually eventuated. All we knew at the time was that based on 20 years in financial markets, the risk-reward balance felt very unhinged given possible broad-based impacts on company earnings and the fact that the bond market was cracking. On that basis, we were out!

Thankfully therefore we have managed to side-step this bear market, and as a quick update to our positioning, we have actually taken the fund to 100% cash. We are now in the most-fortunate of positions to have suffered a peak draw down of less than 4% and are actively looking to be a net-buyer of risk-assets in the future.

But not yet.

For us to be a buyer of equities, we are of course watching a number of data points closely. A number of those are being discussed here on Livewire and elsewhere daily. We wont attempt to go over that work again.

One of the data points we are watching like a hawk which is getting little air-time, but one of vital importance for equities are junk-bond spreads (VITAL!!). As I type, the latest update from the St Louis Fred show junk-bond (high yield) spreads have spiked to 10.87% as at 23/03, as shown below;

                                                             Source: (VIEW LINK)

To put into perspective just how violent this move has been, at the start of 2020 when COVID19 was not even mentioned in the news cycle, spreads were just 3.5%.

To this point, the current market is seeing the highest spreads outside of the GFC, even besting those experienced during the tech-wreck. That's probably worth repeating - the current market spreads in High Yield bonds are the highest they have ever been outside of the GFC... To rub salt into the wound, they continue to go vertical almost daily despite the huge government intervention into the market.