donderdag 26 november 2015

Junk Bond Market Forecasts a Looming Stock Market Crash

There is a particular debt market that is very interesting to watch and that is the junk bond market. We call these bonds "junk bonds" because the debt is issued by corporations that do not have high credit ratings and they need to pay higher interest rates.

The reason why we need to monitor this market is the following. The high yield debt market is a leading indicator for the direction of the stock market. Whenever investors leave the junk bond market, yields will spike upwards and the price of these bonds will decline in value. This will lead to less borrowing and consequently lead to less spending. What we then see is a stock market crash with typically a delay of a few months (see chart below from FRED). You can clearly see that the stock market (red chart) is overdue for a correction as the high yield bond market (blue chart) is declining in value.


Read the full analysis here.

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