Everyone who puts money into a Certificate of Deposit or money market account wants the highest interest rate possible, and the same applies to yield-hungry bond investors.

Generally, the bonds which offer the highest yields are offered by companies with the highest credit risk. These higher yields from so-called “junk” bonds compensate investors for taking on that risk.

During scary financial times, the difference or “spread” between safe government bonds and junk bonds can be quite wide. When investors are complacent, they may be willing to buy junk bonds which yield just a little more than government bonds.

For example, back in February 2007, fears about financial markets were nearly non-existent. Relatively few investors were worried about companies with high credit risk defaulting on their debt. Hence, the junk yield-to-T-bill yield spread narrowed to just 2.2%. Little did these investors suspect that they would soon face the worst economic and monetary crisis since the Great Depression.

Our June Elliott Wave Financial Forecast described what happened next:

Near the end of the crisis, the spread had skyrocketed by a full ten times, to 22.9%, as corporate defaults shot higher and investors panicked into any asset that was perceived to offer safety.

Even just a couple of years ago, when talk about a possible recession was widespread, we had this news item from Bloomberg (June 16, 2022):

US Junk-Bond Spreads Top 500 Basis Points in First Since 2020

• Average risk premiums on junk bonds climb to 508 bps
• Borrowers are paying up on new deals as recession fears rise

However, complacency has returned in a big way here in mid-2024. Let’s return to the June Elliott Wave Financial Forecast with this chart and commentary:

This chart is stunning in its implications. It shows the spread between the yield on U.S. corporate junk bonds and the yield on 3-month U.S. Treasury bills. Junk bonds, IOUs of companies with the weakest financial structures, currently yield just 2.7% more than the risk-free rate on 3-month U.S. T-bills, which is 5.4%. This is one of the narrowest spreads in history, revealing a hunger for risk taking so fervent that investors cannot comprehend a financial environment that will be different from today’s.

Yet, we know that the financial environment can change in relatively short order as was mentioned with the 2007-2009 financial crisis. As you may recall that crisis was not only unexpected, it unfolded rapidly.

We want to give you the complete story of what we anticipate next for bonds, stocks, gold, silver, the U.S. Dollar and the U.S. economy.

Check out what you get with our Financial Forecast Service by following the link below.