Junk bonds have sold off over the past few days pretty significantly. It gets my attention because they are a decent proxy for risk taking. Investors, as I wrote the other day, have gone way out on a limb in an effort to get any kind of decent income on their investments. The 10-year treasury bond pays less than 2% and CDs and savings accounts pay next to nothing. This has been the case for years now and it has inspired investors to “reach for yield.” Junk bonds have been a beneficiary of this process.
Someday the process will reverse itself. Interest rates will go up and bonds will see the end of their epic bull market. Obviously, a couple days selloff is way too soon to decide if this is happening right here, right now but it’s worth paying close attention to. It’s especially worth paying attention to junk bonds because they represent the front line. When they retreat they will leave investment-grade corporate bonds and higher-quality fixed income exposed to a selloff and then we’ll know the reversal of trend is in full force. But it will begin with junk.
Today investors are happy with a 5% yield on this stuff. When the party’s over that 5% will disappear in a heartbeat. Then investors will start to remember why we call it “junk” in the first place. It’s not named after a Black Eyed Peas tune. Still, they may find it hard to answer the question, “what you gonna do with all that junk?”
Chart of the Day
Hit the Links
- Why Did Apple Stock Go Down After Beating Earnings Estimates And Amazon Stock Go Up After Missing? (TechCrunch)
- How to Become Super-Rich? Hint: it’s not in the stock market (AlephBlog)
- Greed is almost off the charts right now (CNNMoney)
- 50% Decline In TV Viewership Shows Why Your Cable Bill Is So High (BusinessInsider)
- Seth Godin: Why Small Businesses Fail (inc)
- How Seth Godin Writes (Copy Blogger)
- Hey, Hockey Fans: Don’t Throw Hot Dogs At Players (BuzzFeed)