The strong performance of non-investment grade (or “junk”) dollar-denominated government bonds in recent weeks has driven the yield premium over investment grade bonds down to 360bp, a level rarely seen since the 2013 “taper tantrum”. But with little improvement in the underlying economic fundamentals of most junk-rated countries, past form suggests that the rally could be reversed – particularly if the Fed raises interest rates sooner than expected. Indeed, we would not be surprised if it hiked the federal funds target rate next month, and twice more in the second half of this year.
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