Saturday, June 28, 2014

Bonds and Stocks - Interesting Relationships

Somebody once told that the truth is in the bond market. Well, let me look at some of these markets to find whether there is any relationship.

I will look at the corporate bonds and junk bonds. As everyone knows, junk bonds are associated with a high risk while corporate bonds vice versa. When investors feel that something wrong is in the making they escape into safe instruments. It means that if such is a case, they should prefer to own less risky corporate bonds to junk bonds.

Let us look at the chart below:


The charts show three markets: stocks (S&P 500), junk bonds and corporate bonds. Below the charts of these instruments you will find the chart showing the relative strength of junk bonds against corporate bonds. As you can easily spot, before any major correction in stocks the corporate bonds were stronger than their junk friends. The most interesting thing is the last junk bonds' relative weakness lasting from September 2013. It has been the longest weakness since 2007. Prudent investors are escaping into less risky instruments and they have been doing that for quite a long time .

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