SPHY - SPHY: Junk Bond Spreads Are Far Too Low Given Debt Maturity Wall

2024-03-28 13:32:03 ET

Summary

• Bond market volatility has been unusually low, raising concerns about potential market shocks and skewed expectations.
• High-yield bonds, such as SPHY, have low yield spreads to Treasuries, meaning they're trading at a premium today.
• Betting against SPHY through put options may be a good short opportunity due to its low implied volatility and potential for a crash by 2025.
• I expect junk bond credit spreads to widen within the coming months due to an acceleration in debt refinancing.

Since suffering record declines, the bond market has been eerily quiet since the latter half of 2023. Volatility in both Treasury and corporate bonds has been much lower than usual, even lower than before the 2022 bond market crash. Inflation expectation data has, for the most part, also been stable, likely due to stability in the energy market. As detailed regarding CME Group ( CME ), the first quarter of 2024 is likely one of the least volatile in recent history based on implied volatility data, regardless of the asset class. In short, markets are stable today. In my view, they are too stable....

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