This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Don't Bet on a Junk Bond Bear Market Just Yet

NEW YORK (TheStreet) -- The price reversal higher in SPDR Barclays High Yield Bond (JNK) the past few days signals geopolitical risks were holding the market back, but those risks could be fading.  

Junk bond indexes spiked sharply higher this week after experiencing large outflows over the past few sessions. Investors worldwide pulled a record $7.07 billion out of high-yield junk bond funds and exchange-traded funds in the week ending Aug. 6, according to Lipper.

Read More: Stock Market Story: U.S. Stocks Grapple With Overseas Jitters

The catalyst for the outflows, however, was not fear of higher interest rates but geopolitical risks. The chart below compares the junk bond index to iShares Barclays 20+ Year Treasury Bond (TLT). It shows that interest rates remained low even as junk bonds broadly sold off.

JNK Chart
JNK data by YCharts

Analysts attribute the initial selloff to overextended prices to the upside and fiscal and geopolitical risks. Treasury bonds have maintained a strong uptrend in 2014 as the Federal Reserve remains committed to low rates till at least next year. This has led to rallies in many interest rate-sensitive assets such as Vanguard REIT Index ETF (VNQ), PIMCO Investment Grade Corp Bond Index ETF (CORP), iShares S&P U.S. Preferred Stock Index (PFF), and of course junk bonds.

The sudden convergence of various narratives such as Argentina’s default, strife in Gaza, violence in Iraq, and Russia’s buildup of soldiers close to Ukraine’s border became too much to bear for risk adverse investors, sparking a selloff in both equities and junk bonds.

"I am completely mindful of the geopolitical factors and unpredictably of those factors," Stephen Antczak, head of U.S. credit strategy at Citigroup, said in a note to clients. "When you factor in Putin-related headlines, it's not a positive but (rich prices, large number of new issuance in June, and fund outflows) weighed on the market more than people take into account."

As foreign risks diminish, however, a buying opportunity arises. Citigroup's model shows that high-yield spreads are now 77 basis points cheaper, compared with 45 basis points richer to fair value in June.

Read More: Dendreon Warns Debt Bomb Might Wipe Out Shareholders

If there is a resurgence of accumulation in junk bonds, then the positive sentiment could fuel equities higher as well. There is an element of uncertainty that remains, but buying the dip when fear is at its greatest has been a profitable strategy the past few years.

VNQ Chart
VNQ data by YCharts
 

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,055.87 -116.81 -0.68%
S&P 500 1,982.77 -11.52 -0.58%
NASDAQ 4,508.6880 -19.0010 -0.42%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs