Getty Images / Scott Barbour
- Goldman Sachs says one part of the market is the most "mispriced" since before the financial crisis.
- The development is an extension of investors willing to take on more risk, even as market uncertainty swirls.
Risk-taking behavior is alive and well, at least in one corner of the market.
The credit-risk premium (CRP) for CCC-rated bonds - the riskiest segment of the high-yield universe - has fallen to negative 53 basis points, the lowest since 2007, according to data compiled by Goldman Sachs.
Translation: The debt issued by companies with the worst credit is out of whack to a degree not seen since before the financial crisis, and it means bond investors are ill-positioned for even the most mundane market conditions.
For further clarity, Goldman defines CRP as "the extra premium earned by investors as compensation for future default losses." When it's low, investors are getting minimal bang for their buck, relative to history. So if they continue to buy, it signals high conviction and a healthy risk appetite.
"The premium currently embedded in high-yield spreads is mispriced even if default losses do not ratchet up to recession-like levels," Lotfi Karoui, the chief credit strategist at Goldman Sachs, wrote in a client note.
The chart below supports the idea that high-yield investors have become fervent buyers of CCC-rated bonds. It shows that CCC excess returns have outperformed relative to their higher-rated counterparts this month.
Goldman Sachs
Goldman does note, however, that these types of conditions can persist for an extended period without facing a correction. Still, the firm doesn't see much value in continuing to chase returns in assets that are so unattractively priced compared to the rest of the market - including other, less risky junk bonds.
So what should you do? Goldman says risk-hungry high-yield traders should look elsewhere. In their mind, CCC bonds simply aren't worth the money, nor the potential hassle further down the line.
"Aside from Energy, we continue to see little value in CCC-rated bonds at current levels," said Karoui.
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