The role of the Fed, so goes the saying, is to take away the punch bowl when the party gets out of control.
Not Today’s Fed
However, today’s Fed is the exact opposite - it insists that the bowl is there to stay until everyone and everything is smashed, literally. Because the Fed and the Treasury are forcing everyone from banks, pension, hedge and private equity funds, all the way to froth-in-the mouth individual speculators to accept as much risk as possible in order to achieve small and rapidly diminishing returns. The yield spread between junk and Treasury bonds just hit an all time low yesterday at just 2.59% - chart below.
Imagine that: an income-oriented investor is now forced to accept a very significant risk of losing all of his money to default to make a measly 2.59% more than the safest AAA Treasury. Given that the historical average default rate for high yield bonds is 4.5-5.0%, how rational is that?
Yield Spread Between Junk And Treasury Bonds Hits All Time Low
And that, among many other signs of excess, may soon lead to a rather unpleasant future, as the next cartoon “predicts” 😂 Have a great weekend