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.

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.

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