For Now, Junk Bond is still safe

Merrill Lynch’s benchmark index for junk bonds fell 1.6% last month, its biggest drop since 2016, while the S&P 500 sank nearly 7% and the Russell 2000 index of small stocks plunged 11% to mark the poorest monthly performance for both since 2011.

The chart below shows the performance of US Bonds:

Jeffrey Gundlach, the chief executive of DoubleLine Capital, said one of the reasons not to believe a downturn was imminent is that high-yield spreads have been contained. “I do in fact believe there will be a mass exodus from junk and investment grade, once the next recession hits, and it will be in evidence in a less obvious way before that.”

Moody’s Default and Ratings Analytics team forecasts that the United States’ trailing 12-month high-yield default rate will sink from 3.06 percent in September 2018 to 2.0 percent in September 2019.

For most investors, high yield trailing equities is an indication that a downturn is not yet around the corner. Junk bonds – the high-yielding debt issued by the riskiest corporate borrowers – had a rough October, but nothing close to the magnitude of bloodletting over in equities, for now.

Reference:

Reuters, Kate Duguid, 2018-11-12, “US Equity Markets Not Taking Their Cues From High-Yield Junk Bonds”