The riskiest corner of the bond market is pointing to continued strength of the US economy
High-yield bonds, issued by companies with below-investment-grade credit ratings, are flashing signs that investors don't see much trouble ahead for these companies.
DataTrek Research this week flagged that high-yield bond spreads—essentially the yield paid to investors over a benchmark like Treasurys—are low. When spreads are wider, it suggests investors see more risk ahead and are demanding higher compensation to hold the bonds.
Yet, even with the possibility of President Donald Trump's sweeping tariffs raising inflation and negatively affecting the economy, high-yield bond investors are calm.
"US High Yield corporate bond spreads are now lower than at any point in 2021. This risk-wary market is just as bullish on the American economy as stocks," DataTrek co-founder Nicholas Colas said.
Colas noted that in 2021, markets were bullish on the prospects for the economy as the US began climbing out of the pandemic and households and companies were flush with stimulus cash.
He compared the current strong performance of high-yield corporate debt to large-cap stocks, which are also riding a wave of bullish enthusiasm among investors.
"Given that bond investors are a more cautious lot than their equity market counterparts, that is a bullish signal for stocks," he said.
Elsewhere in the bond market, Treasury yields have edged up this week as Trump fired off a fresh salvo of tariff updates, most recently threatening Canada with 35% tariffs starting on August 1. Yet, some investors aren't worried.
Steve Eisman, known for his role in "The Big Short," said this week that Treasury yields have been basically tranquil since 2022, indicating investors aren't worried about things like the deficit or mounting US debts.
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