Thursday, August 27, 2009

Corporate Bonds: Asset Class Review

Recent asset class reviews have focused on grains, industrial metals, Treasury debt, and crude oil, gold, and the U.S. dollar. In this look, we will examine U.S. corporate bonds: investment grade (LQD; top chart) and high yield (JNK; bottom chart).

Note that bond prices plunged during the late 2008 crisis, as investors fled riskier debt and sought safe haven in Treasury instruments. Interestingly, one tell for the market bottom in March was the fact that we made new lows in high yield bond prices, but not investment grade.

Since that time, investment grade bonds have steadily moved higher, retracing much of their decline from 2008. High yield bonds have retraced only a portion of their total declines, but note that their percentage gain from the March lows has been higher than that for investment grade bonds. This, like the rally in emerging market equities, is an example of how we have seen riskier assets lead the way during the 2009 recovery.

Most recently, the new highs in LQD have not been confirmed by JNK. That is just another one of the non-confirmations on my radar, as riskier assets have recently underperformed safer ones. I am watching these intermarket themes closely to see if the dynamics of the market recovery are changing or if this is simply an August pause that refreshes the risk rally.