Last week we received some prominent media attention in response to research published by our partner Martin Fridson on the recent high yield bonds price action and the risk of recession. In essence, credit markets throughout 2022 have been painting a rosier economic picture than the stock market.
An August 16 Financial Times article (“US Junk Bond Market in Powerful Rebound on Easing Inflation Worries,” by Ian Johnston and Eric Platt - subscription required) quoted LLFA Chief Investment Officer Martin Fridson on a change in sentiment in the speculative-grade debt market:
“Over a strikingly short interval, high-yield investors came around to believing inflation was sufficiently under control, and that the Fed would not have to hike interest rates dramatically enough to trigger a deep recession. Time will tell whether they were correct in changing their views on that matter.”
In MarketWatch that same day, Joy Wiltermuth (“Junk Bonds Sweep to a Record Summer Rally”) cited Fridson’s finding that between July 5 and August 12 the yield premium on lower-rated bonds decreased at the fastest rate on record within a comparable range.
Max Chen, writing on August 17 on the website ETFTrends (“Investors Are Jumping Back Into Junk Bond ETFs”) reported that Fridson had documented a decline over five weeks from 11.6% to 6% in the proportion of high yield bonds trading at distressed levels.
Finally, on August 19 Bloomberg News’s Jill R. Shah and Olivia Raimonde (“Junk Falls Into ‘Eye of the Storm’ With Recession Fear Reviving” - subscription required) highlighted Fridson’s observation that the recent compression of the high yield risk premium over just 1.2 months compared with a previous minimum time elapsed of 3.9 months.