Is High Yield Expensive?

Event

Date

AAA

AA

A

BBB

BB

B

CCC

CDO Trough

6/5/2007

5.62

5.68

5.90

6.21

6.74

7.34

9.12

Recent Trough

1/25/2013

2.09

2.09

2.47

3.34

4.51

5.64

9.57

Now

2/6/2013

2.10

2.12

2.50

3.42

4.73

6.10

9.80

Yes, I think high yield is expensive, and stocks as well.  We have replaced a set of maniacs who were creating CDOs, with a single maniac, the Federal Reserve.  The Federal Reserve has less effect on junk bonds because they directly affect Treasuries and Agency MBS.  Those are far more similar to AAAs than junk bonds.

When CDOs were bidding for every yieldy bond, they compressed relative yield spreads to unbelievable levels.  Today, those unbelievable yields come from the Fed.  They bid for MBS and Treasuries, leaving others to seek yield in riskier notes.

There is real risk here, and the Fed will get whacked when normal yield relationships, and real yields re-emerge.