Junk Bond Yields on the Decline Again

Rising faith in the economy’s recovery is pulling corporate junk bond yields down -- again.

An index of the average annualized yield on 100 junk bonds tracked by KDP Investment Advisors fell to 8.56% on Tuesday from 8.68% on Friday, and now is the lowest since July 23.

Yields on junk bonds -- securities rated below investment grade -- plunged in spring as more investors began to bet that the economy would rebound.

As business picks up and corporate earnings rise, the financial outlook can improve for debt-burdened firms, in turn lowering the risk that they might default on their debts. That boosts demand for their bonds.

But in late July and early August, bond yields surged across the board as investors fretted that the accelerating economy might spur the Federal Reserve to begin tightening credit soon.

The 10-year Treasury note yield, a benchmark for other long-term rates, rocketed from 3.63% on July 11 to 4.56% by Aug. 13.

In that same period the KDP junk bond yield average rose from 8.60% to 9.27%.

In recent weeks, however, junk bond yields have been falling again even as Treasury yields have continued to rise.