NYU's Altman Sees High Yield Bond Correction (JNK, HYG), Plus Greek Contagion Risk (Spain and Portugal) Feeding Into Euro

Edward Altman, a finance Professor at NYU, thinks a correction is near for high yield bonds.  Below are quotes, the Bloomberg Video and charts of HYG and JNK (high yield bond ETFs) in a rising wedge, waiting for a catalyst.
"I'm concerned that it's come back too fast and too furious and the spread between high yield bonds and 10-year Treasuries now below 4.5% is too low given the risks in the market. So, it's very nice to see this recovery. The world was on a verge of elimination of its financial markets and now its come roaring back. But I think too fast, too furious and there will be a correction".

The size of the high yield correction:
"I think perhaps 3300 basis points maybe even more if several events happen at the same time. And don't forget we were at 2000 over, now we're at 450 over. It could go back to 780 even 1000 over if things really turn bad but I don't expect it in 2010"

Altman also thinks it's "even money" that Greece will default in 1.5 or 2 years and sees Greek contagion risk spilling into Spain, Portugal and other EU countries with high debt/GDP, deficits and unemployment. This will also mean tough times for the Euro. Watch the video.

I recently compared Treasury Bond ETFs to Investment Grade and High Yield Bond ETFs in my previous post and embedded a Forbes Video analysis on high yield bond ETFs.  So for spreads to widen, Treasury yields need to fall or high yield bond yields need to spike.




$JNK (SPDR Barclays High Yield Bond ETF) (Courtesy of Stockcharts.com)

$HYG (iShares iBoxx High Yield Corporate Bond Fund)

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