Thursday, July 31, 2014

A Don't Touch My Junk Market

A useful measure of risk appetite vs. risk aversion in US fixed income markets is the relative performance of high yield bonds (JNK) to liquid, highly rated bonds (LQD).  Note how this ratio topped in late 2013/early 2014 and has been making fresh lows in recent days.

The ratio is not a precise market timing tool, but does give an indication of when investors feel comfortable reaching for yield and when they feel comfortable sticking with safety.  Even as stocks have been making new highs this year, investors have been less willing to touch the junk.  

There was a major episode of JNK:LQD risk aversion at the 2009 stock market low and we've seen bouts of fixed income risk aversion recently during market corrections at mid- and late 2012; April, 2013; February, 2014; and April, 2014.  When markets least want you to touch their junk, the opportunity antennae should perk up.  

Could we, however, be rolling over on a longer-term basis in terms of willingness to reach for yield?  The next post will take a look at that possibility.

Further Reading:  Letting Markets Tell Their Stories