Junk Bond Investor: Relief Rally or Dead Cat Bounce?

The recent market selloff has caused investors to flee the stock market and look for more safe-haven assets. That includes cash and gold. For the first two weeks of the stock selloff, the bond market traded calmly.

In the last week, however, bond yields started to diverge from each other. Specifically, high-yield and lower-credit saw a push higher. Those rising yields suggest investors started to look at bonds in terms of their safety of repayment.

What caused this move weeks after stocks started falling? The recent economic data suggests a sluggish economy. Inflation is starting to slow. And consumer spending is moderating. And unemployment is starting to tick higher, even before government layoffs show up in the statistics.

However, the slight change in dynamics in the bond market suggests caution. Investors in bonds are typically focused on the return of their capital. That’s in contrast to the stock market, where the focus is on big gains.

For now, yield spreads are still relatively normal. However, a further widening, irrespective of what the stock market does, could signal trouble.

Investors looking for the safety of the bond market should stick with higher-rated debt offerings. Potentially, investors could even look to lock in U.S. Treasuries ahead of further rate cuts this year.

To see the full changes underway in the bond market, click here.