| Regardless of veracity of the conclusions, one key issue is that the author is looking at absolute yields, when they should be looking at credit spreads. They state: >Higher rates mean higher returns. A junk bond historically hovered around a high yield of 10%. This attracted investors to the bond despite the risk of the company defaulting Broadly true, but it's the spread above the risk free rate that is important. If US government bonds yield 15% and some BB rated bond yields 16%, one would be unlikely to invest it in regardless of the high absolute yield. That differential is called the credit spread - the amount you are paid in excess of the "risk-free" rate to take the credit risk of the bond issuer (i.e. the risk that they don't pay you back). The reason BB bonds are at 4% is not because the credit spread is at a historic low, but because the risk free rate is around 1.5%. Current BB spreads are low, around 2.5%, but not historically so. They were at 2% in the late 90's, at the current level in the mid 2000's, and actually haven't moved a lot in the last 2 years. This earlier period is the time the author refers to when absolute BB yields were ~10%: Spreads: https://fred.stlouisfed.org/graph/fredgraph.png?g=q4Up Yields: https://fred.stlouisfed.org/graph/fredgraph.png?g=q4UD Ps: The St. Louis Fed FRED site is excellent! |
