The yield spread between U.S. junk bonds and Treasuries has decreased to 2.88 percentage points, a historic low, indicating strong investor confidence in the economic outlook. This trend mirrors the optimism seen in the stock market. Notably, the iShares iBoxx $ High Yield Corporate Bond ETF and SPDR Bloomberg High Yield Bond ETF (JNK, Financial) have both achieved approximately 5% returns in the first half of the year.
DataTrek Research's Nicholas Colas highlights that junk bonds' strong performance reflects a bullish sentiment similar to equities, despite the generally conservative nature of bond investors. This reduced spread suggests that investors do not foresee an imminent recession, even amidst recent tariff policy-induced market fluctuations.
Michael Chang from Vanguard notes that June was an exceptional month for high-yield bonds, despite concerns about tariffs. He believes that while tariffs may slow economic growth, they are unlikely to trigger a recession. The current annual yield of U.S. junk bonds is around 7%, subject to change with yield spreads.
