The world of high yield dividends and high yield bonds has reached a level that seems almost unheard of just a year or two ago. If this is not a testament to junk bonds not being that junky then nothing else is. The flip-side of the coin is that this is also a testament of a growing bubble in the price of high yield bonds and junk bonds from companies in America.

Standard & Poor’s has now released that its investment-grade composite spread was flat at 183 basis points on Monday. That is not ridiculous historically, but we cannot say the same about the high-yield bond spreads. The speculative-grade composite spread narrowed by 5 basis points to 494 basis points.

Yes, that is under the 500 basis point mark!

What dividend and high-yield investors need to know is that investment-grade spreads are under the one-year moving average of 194 basis points and under the five-year moving average of 242 basis points. Junk is even narrower historically. The 494 basis point spread compares to a one-year moving average of 599 basis points and compares to a five-year moving average of 747 basis points.

Here are spreads among regular investment grade and high-yield spreads of junk bonds by rating (Basis Points are “bps”):

• AA 126 bps
• A 152 bps
• BBB 211 bps
• BB tightened by 4 bps to 355 bps
• B tightened by 4 bps to 508 bps
• CCC tightened by 9 bps to 808 bps.

If you want evidence of how this is being reflected, all you have to do is to look at the ETFs and closed-end funds in the sector. The SPDR Barclays High Yield Bond (NYSE: JNK) is at an all-time high of $41.69 and this is the top ETF for junk bonds. It also has options which trade on it. Two closed-end funds are also close to highs as  well. Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) is at $6.61 versus a 52-week range of $4.72 to $6.84 with a 5.90% yield. Be advised that this dividend was just lowered recently to $0.039 per share from $0.042 per share per month. Then there is BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) at $13.31 against a 52-week range of $11.40 to $13.58 with an 8.1% implied dividend yield.

This is uncharted territory for recent years going into, during, and after the great recession. Attached is a chart from a report that was sent to me in late 2012 by S&P that goes back to 2004.

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