Looking at Spreads

In the immediate aftermath of the Fed's talk about tapering its quantitative easing (QE) program and subsequent selloff in bonds, I recommended that readers consider high-yield bonds as a good risk/reward play. At the time I pointed out that it had never happened in the last 25 years that interest rates rose at least 100 basis points (bps) and yet high-yield bonds spreads (which is just the yield gap between high-yield and Treasury bonds) increased.

The logic is that interest rates can only rise substantially in an improving economy and in that environment, credit risk should be in decline. Thus, high-yield spreads should logically drop, because with credit risk diminishing, investors should be demanding less compensation for taking on that risk....504 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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