(May 8th, 2012) During the stock market sell-off last Thursday and Friday, the S&P 500 and Dow Jones Industrial Average pulled back 2.37% and 1.74% respectively. Furthermore, crude oil got hit very hard, dropping more than 6%, the Australian dollar, corn, and soybeans each sold off, and Treasury yields dropped. Essentially, it was the typical so-called “risk-off” market environment. However, there was one notable exception: high-yield corporate bonds.
Usually, when you get a 1%+ single-day drop in the major market indices, high-yield corporate bonds will also show notable weakness. This makes sense, as companies with lower-rated debt are regarded as more sensitive to changes in the economy. Therefore, if stocks are selling off due to perceptions about a weaker economy ahead, high-yield often sells off in concert. In fact, if you overlay a chart of the S&P 500 with that of either of the two popular high-yield corporate bond ETFs, JNK and HYG, you will notice a strong correlation in terms of price direction.
From last Wednesday’s close to Friday’s close, JNK was down just 0.13%. In fact, it actually closed up on Friday, the day stocks experienced the biggest portion of their two-day sell-off. Likewise, HYG was down just 0.26% during the equity market pullback. Furthermore, on Monday, both ETFs rallied enough to completely offset the minor losses of the previous two trading sessions. Stocks, on the other hand, are nowhere close to recovering the losses from Thursday and Friday.
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