Junk No Longer High Yield

Junk bonds are no longer high yield bonds. The chart tracks the recent history of the yields on the broader high yield index (red line) and the index of CCC and lower issuers (blue). Both yields are now well under 10%, with the CCC and below at 7.23% and the broader index yield at 4.10%.

For comparison, the 10-year Treasury bond is at 1.18% (green). Investors continue to seek out higher yields as the Fed has kept short rates near zero and continue their bond buying program. As a result, corporate investment and non-investment grade yields have collapsed to record lows. Corporate bond issuance has surged and even PIK (payment in kind) bonds have reemerged.

All of this corporate bond activity has coincided with a dramatic shift in non-financial corporate balance sheet capital structure. The black line on the chart is the ratio of debt to equity for non-financial corporations in the U.S. Note the ratio doubled from lows shortly after the GFC. Low interest rates ease the burden of this debt for now. Some of the issuance likely funded share buybacks which increases the numerator while shrinking the denominator. At some point, this could be a debt restructuring opportunity. Something in which to marinate.