Junk Bonds: Best Equity Predictor

April 11, 2023

Mish's Daily

By Mish Schneider

Junk bonds are high-risk, high-yield bonds issued by companies with lower credit ratings.

These bonds are also known as speculative-grade bonds or high-yield bonds because they offer a higher rate of return than investment-grade bonds but come with a higher risk of default.

Companies that issue junk bonds have lower credit ratings because they may have a history of financial instability, may be highly leveraged, or may operate in industries with volatile revenue streams.

Hence, they are the ultimate measure of risk on/off because the nature of these bonds is well, higher risk.

With CPI, PPI, on tap, the technical setup in junk bonds as seen on the weekly chart of HYG is very interesting.

There are so many calls for recession citing all kinds of reasons from declining money supply to more bank failures to a housing crash.

However, to us (and at this point junk bonds) those calls are based on an old paradigm that since Covid has forever changed.

Just for giggles, how can we go into a recession when we were never really in an expansion or even a period of growth?

Covid shut the economy down, but other than a return to normal, have we seen any real economic growth apart from the labor market?

And of course, the price of raw materials-but that’s a story for another time.

This of course supports a variation on the stagflation theme.

Nevertheless, junk bonds are a hair away from confirming a bull flag. The breakout corresponds perfectly with the 50-week moving average.

Should the junk bonds rally more from here, that takes them to the next level of resistance or the 200-week moving average at 78.00.

Considering the bonds’ low volatility on an average day, that could take the market up to test August highs or around 430 in the SPY.

Of course, we must also consider that HYG does not break out. A move under 73.00 would mean risk off.

However, the Real Motion Momentum Indicator shows a positive divergence in that the momentum has cleared the 50-WMA before the price has.

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