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Junk Bonds Officially Enter ‘Bubble’ Territory

This is a syndicated repost published with the permission of The Felder Report. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

Marty Fridson, of Standard & Poor’s Global Market Intelligence, reports today that on September 8 the difference between the yield on junk bonds and the company’s estimation of fair value stretched to two-standard deviations of its long-term average. To understand just what this means, Fridson writes, “a divergence of just one standard deviation qualifies as extreme overvaluation in our analysis.” Two-standard deviations is far more rare than even this measure of “extreme overvaluation.” In fact, it’s the mathematical threshold Jeremy Grantham uses to define a financial “bubble.”

fridson-09-20-chart-1Chart via highyieldbond.com

For what it’s worth, the last time junk bonds crossed this valuation threshold was May of 2008. They lost nearly half their value over the next ten months.

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