Junk Bonds Jump Back To 2007 Levels

High-yield debt approaches par for the first time since before the crisis.

The riskiest class of corporate bond has inched close to par for the first time since 2007. The high-yield bond market now trades at 99.48 cents on the dollar, according to a Bank of America-Merrill Lynch Index, its highest price since the financial crisis hit in 2008. Hitting par (100.00 cents on the dollar), or face value, is a reflection that investors think they have little to fear.

The last time the market traded at par was June 11, 2007. When credit markets collapsed after the fall of Lehman Brothers, the typical high-yield bond bottomed out at 54 cents on the dollar in December 2008.

"The (high-yield) market is definitely indicating that the economy is on a solid footing," says Martin Fridson, head of Fridson Investment Advisors in New York. "You can't rule out entirely a slide back into recession, but the likelihood of that has diminished significantly."

High-yield bonds have rewarded investors with a +49% return in the past 12 months and +6.8% so far this year. Fridson says the market's surprisingly quick rebound since the financial crisis is a testament to the Federal Reserve's efforts to revive credit – keeping benchmark lending rates near zero while mopping up mortgage bonds and other securities considered toxic. "You got two years of returns in one year," he says.

 Bank of America's high-yield index currently pays an 8.1% yield. Over the last 20 years, the yield has dropped below 8% for a total of 28 months, Citigroup's strategists say, and has never sunk below 7%.