Friday, August 20, 2010

Junk Bond Funds Continue to Disagree with a Double DIp

If Junk Bond investors (JNK) aren't scared of a double dip in the US economy, it makes us wonder why stock investors remain so concerned. After all, junk bond companies are always at the highest risk of default when the economy turns weak. Sure company balance sheets are very strong now, but that's only the companies that have high quality bonds such as IBM that recently borrowed at the unheard of 1% for 2 years.

Any company that still has to pay a high yield must have a very weak balance sheet. Wouldn't have to pay high interest rates otherwise. These companies would be crushed if the economy fell into another recession. This dichotomy in the markets is perplexing. Either the SP500 will rally back to recent highs or this index will eventually roll over.

Its interesting that JNK collapsed with the flash crash and corresponding drop to lows below the flash crash, but it has since not seen the same struggles as stocks. 


2 comments:

TraderMark said...

I would argue its the quest for yield. The Fed has killed savers - you can give to the govt for 10 years for 2.6% nowadays. So people are going for yield since they do not want to partake in equities. The emerging mkt debt is even better than High yield US... people are trying to find any bond that offers something decent.

All these mkts are so distorted by the Fed, the normal price signals are useless unfortunately. we have a flood of liquidity thrown into the ether and much has gone to capital markets. Now that people are avoiding equities since late April you can see junk, normal corporate, and foreign emerging all soaring. Its an asset allocation play I think.

Stonefoxcapital said...

Agree everything is very distorted by the Fed, but I don't get buying JNK instead of equities. Junk bonds have the same downside risk as stocks. It might just be that bonds are 'sexy' now. If thats the case then, any stock weakness is more the lack of interest in stocks then fear of a double dip.