06/17/10 Jacobus, Pennsylvania – Market internals remain bearish. The rush to cut portfolio risk remains intact. Here is a two-year chart of the S&P 500 (in red) and the iShares High-Yield Corporate Bond ETF (HYG):
Both lines in the chart reflect investors’ risk appetite. Over the past year, retail investors have been piling into corporate bond funds. This inflow helped push bond prices up and yields down, allowing heavily indebted companies to refinance bank debt with proceeds from corporate bond offerings.
Lots of credit risk has shifted from the banking system to the bond market, where we have transparent, tick-by-tick pricing of credit (as opposed to “mark-to-myth” accounting of bank loans).
The return of risk aversion will drive many investors toward higher-quality bonds (away from “junkier” funds like HYG with higher yields and higher credit risk). This isn’t good for leveraged companies that rely on access to easy financing in the bond market.
Dan Amoss
for The Daily Reckoning
Dan Amoss
Dan Amoss, CFA, is a student of the Austrian school of economics, a discipline that he uses to identify imbalances in specific sectors of the market. He tracks aggressive accounting and other red flags that the market typically misses. Amoss is a Maryland native, a graduate of Loyola University Maryland, and earned his CFA charter in 2005. In spring 2008, he recommended Lehman Brothers puts, advising readers to hold the position as the stock fell from $45 to $12. Amoss is managing editor of the Strategic Short Report.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
