Yield Spread Between Junk Bonds and Stocks

Here’s another good chart from the BI list that I posted earlier.  This one comes from David Schawel.  It shows the junk bond yield minus the earnings yield on the S&P 500.   As you can see, the spread is at a level that almost defies logic.  This is a theme that’s been growing in popularity in recent months (see here for instance).

Here’s David’ comment:

“The chart below shows the spread between the yield on junk bonds and the yield received from holding stocks.  The spread recently turned negative for the first time ever, showing just how much the yields on high-risk bonds have come down as central banks keep benchmark borrowing rates depressed and investors search further out on the risk spectrum for yield.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. well, Bernaneke can definitely smile at that chart. he has managed to push yields beyond recognition and starve all those who seek income. no wonder the boomers are reluctant to retire in this environment.

  2. The notion that the FED is responsible for pushing those yields lower is preposterous. It’s again Mr. Market that has pushed corporate bond yields this low.

  3. Could that be an indication that investor sentiment has shifted from an expectation of deflation, to an expectation of inflation?

  4. Bond investors seem to have no idea.

    They are walking on air – literally!

    Yet the flow into bond funds continues…stand still little sheep…..

  5. How in the world could historically low bond yields be an indication that “investor sentiment has shifted … ton an expectation of inflation”?

  6. Ooops, I meant that the other way around.

    I shouldn’t make comments when I’m under the influence of antihistamines!

  7. Based on the chart shown, it seems that equities are a better value than high yield “junk” bonds for the time being. But if Europe failes to stay placid, or if Congress fails to compromise on either the cliff or the debt ceiling, then BOTH equities and junk bonds would be vulnerable. It is a risky environment overall, maybe even riskier for HY than for other risk assets.

  8. Compare after-tax profit margins to B bonds. They usually trade inversely, not as some magic difference number. Not sure what this graph tells me, except corps are making a bucket of money, which we already know.

  9. Cullen, did you see Dow futures down > 200 points? House Republicans revolting against a Boehner compromise?

  10. If the S&P EY is based on expected forward operating EPS, then this is garbage. Investor gets a much lower EPS after “one time write-offs” which happen every year (so much for the definition of one-time) and executive options dilution. First I want to see a comparison of a proper EPS yield to junk bonds.

    Secondly, this is an apples vs. oranges comparison. Who said that junk bonds and equities have the same risk. Recently(last 20 years) it seems to me that junk bonds are a better proposition than eqities. anyway, such a comparison must adjust for risk, before making a statement.

  11. InvestorX, point #1 is exactly what I said.

    See comment above from 12/20 at 3:25 pm.

  12. The movement into HY is fascinating. Does anyone know if “junk” balance sheets are safer than they have been historically? Broadly speaking corporate balance sheets are healthier than they have been in the past. I really wonder about how useful longitudinal charts on these yields are because the underlying components change so much over time.

  13. So? What is the point? Spreads can stay low for a long time. They have little or no predictive power. Nice chart, but no meaning. George Dagnino