Friday, September 24, 2010

Stocks reconnect to corporate bonds

One month ago I noted the puzzling disconnect between equity prices and junk bond prices. They had been joined at the hip for a long time, but equities had drifted down while junk bond prices had drifted higher. I speculated that the corporate bond market was the one to follow in this case, since it has led the equity market many times in the past. I'm happy to report that this looks to have been a good call, with equities up almost 10% in the past month, and high-yield bond prices (using HYG as a proxy) up a bit less than 2%.

HT: Stephen Cook, for bringing this to my attention.


John said...

I'm sure there were several factors to the August swoon in equity prices but one I believe contributed was the widespread belief that September is the worst month of the year for equities. Traders shorted the market aggressively during august believing september would be weak. The number of market participants was low during the month, august being a traditional vacation month in the northeast (last shot at great beach weather in the Hamptons, Nantucket, etc.). The thin audience made the market easier to move around. When the crowd returned in September, the market was oversold and short interest was high. As double dip fears eased, the short covering rally morphed into a bull run.

As I said, I'm sure there were other factors but the equity selloff did not affect high yield bond prices, and that was a good 'tell' the decline might be bogus.

CDLIC said...


Additionally, as we move closer to the November election, all indications are power will shift in Washington DC easing the attack on wealth, the producers and Capitalism--until the Republicans return to their old ways of spending and regulation. This is certainly a positive for those holding back from market participation to move into equities.