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.
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.
Comments
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.