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The Fed is Worried About Junk Bonds

In her semi-annual testimony on Capitol Hill that started on Tuesday morning, Fed Chair Janet Yellen made it clear that the Fed is concerned about high-yield bonds: “While prices of real estate, equities and corporate bonds have risen appreciably and valuation metrics have increased, they remain generally in line with historical norms. In some sectors, such as lower-rated corporate debt, valuations appear stretched and issuance has been brisk.”

The temperature in the high-yield space has been pretty warm: in June issuance hit a record high, with volume for the month amounting to $29.27 billion from 60 issuers – the most for any June on record (with the activity in April and May, second quarter issuance totaled a record $105 billion). Meanwhile the yield on the S&P US Issued High Yield Corporate Bond Index reached a 13-month low of 4.77% in late June. So its not surprising that the SPDR Barclays High Yield Bond ETF plowed through June looking a bit frothy and overbought.

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