Junk Bond Rally | Stock Market Investing

Tuesday, April 22, 2008 | Home | Andy Mayo

April has been a pretty good month for junk bonds given the fact that we're in the midst of a financial-system-shaking credit crisis and a recession to boot. 

One of the junk bond mutual funds that has correlated very nicely with stocks over the years is the Smith Barney High Income fund (SHIAX), which is up 2.5% since the first of the month and up 4% since March 17.

Two exchange traded funds have done much better -- the DLJ High Yield Bond Fund (DHY) up 14% and the Blackrock Corporate High Yield Fund (COY)  up 13.6%.  The price of each has moved above their respective 50-week moving averages.  The last time such a cross-over happened was in mid-2006.  You may recall the stock market rocket that took off in August.  If these cross-overs holds, they may be one more confirming piece of data that this bear market has bottomed. 

(The S&P 500 Index exchange traded fund SPY is up 4.5% so far this month.)

Federal Reserve Bank data shows Moody's seasoned Baa corporate bond yields hovering around 7%, up from 6% in 2005 but still a full percentage point lower than  in the 2000 recession.  What's it all mean?  Well, unless it truly is different this time, and history is no longer a guide, it's bullish for stocks, crazy as that seems, on a fundamental, economic basis.  Here's history:





The correlation is pretty clear.  Charts courtesy of StockCharts.com.

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