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Marty Fridson, of Standard & Poor’s Global Market Intelligence, reports today that on September 8 the difference between the yield on junk bonds and the company’s estimation of fair value stretched to two-standard deviations of its long-term average. To understand just what this means, Fridson writes, “a divergence of just one standard deviation qualifies as extreme overvaluation in our analysis.” Two-standard deviations is far more rare than even this measure of “extreme overvaluation.” In fact, it’s the mathematical threshold Jeremy Grantham uses to define a financial “bubble.”

fridson-09-20-chart-1Chart via

For what it’s worth, the last time junk bonds crossed this valuation threshold was May of 2008. They lost nearly half their value over the next ten months.