Out Fox The $treet

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. 

Very odd to the Junk Bond Funds doing so well in the face of a recession. The iShares High Yield Corporate Bond Fund (HYG) has in fact held near recent highs. Much higher then even back in 2007 prior to the collapse of the economy. What do junk bond investors know that equity guys don't? Surely these bonds would plunge if a double dip was imminent. Why is it holding up better then in mid 2007? Sure corporate profits are strong and the general balance sheet is strong, but these companies wouldn't have junk bonds if they feel into that category. A double dip should be disastrous to such a company. Stocks of such companies like a Terex (TEX) or Liz Claiborne (LIZ) have just about been annihilated in this selloff but not the bonds of other high yielders? Thought bond traders always knew best. Non confirmation of the Junk Bond Funds. First, the HYG has hardly budged from recently highs and has easily rebounded from the flash crash lows. Another similar fund from Braclays (old Lehman...