What are junk bonds telling us?

TLDR:

Watch junk yields. They’ll tell us if we’re in a slow-moving recession or if things are still ok. For now, we’re ok.

Source: Toggle AI

Junk is an important asset class.

Called ‘high yield’ in polite society, junk bonds are the first in line when things go bad: they are practically equity packaged in bond format.

Considering how bad the market has treated Treasuries in the latest hiking cycle, junk has performed remarkably well.

That’s encouraging, as the range bound nature of these bonds makes them a natural beacon to assess value and risk in the market.

The chart above shows junk’s yield, therefore up = bad, down = good. As you can see, junk has been fairly unfazed by the recent selloff and you can draw one of two conclusions here:

Optimist conclusion: junk is telling us that the economy is not in such dire straits, therefore stocks sold-off too hard.

Pessimist conclusion: junk has not priced in the economic realities embedded in stocks, and will need to fall.

It’s generally accepted that bonds are better at pricing short-term fundamentals than equities, because they focus on a simple short-term question: “are you going to pay my next coupons?”.

So for the time being, we’re going with the optimist conclusion.

What’s happening in the markets?

This section is powered by Open AI connected to TOGGLE AI

In September, private payroll growth experienced a significant decline, as revealed by the ADP report released on Wednesday.

The report indicated a total job growth of 89,000 for the month, a considerable drop from the upwardly revised figure of 180,000 in August and falling below the economists’ estimate of 160,000. Notably, the gains were primarily observed in service sectors like leisure and hospitality. Moreover, ADP reported a slowdown in annual wage growth, which stood at 5.9%, marking the 12th consecutive monthly decline.

This report followed the unexpected surge in employment vacancies at US businesses revealed by the JOLTS survey a day prior.

Despite these findings, the official government tally is expected tomorrow, with economists estimating a nonfarm payroll increase of 170,000 for September, a decrease from the reported rise of 187,000 in August.

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Originally Posted October 5, 2023 – What are junk bonds telling us?