Junk bond markets are confirming the behavior of equity markets. We monitor the behavior of junk bond markets because they say a lot about the mood of financial markets. In fact we would go so far as to say that the junk bond market tells us all we need to know about what is happening in financial markets from a risk taking perspective. We use the price performance of large mutual funds as our proxy for the bond market. From the charts below notice how the T Rowe Price High Yield Fund was falling well before the US stock market crashed in September/October last year, also note how the mutual fund did not make a new low in March when the S&P 500 did. We don’t know how far equity markets are going to rally, but while the junk bond market continues to rally alongside the equity market we conclude that one should expect more upside in equities.
It is interesting to note that the yield of the T Rowe Price High Yield fund is about 8% which is still over double that of the US ten year treasury. We think a “fair value” would be a premium of 50% over the US ten year. Clearly there is considerably more upside potential in Junk bonds and by default equities.
Our global wealth builder portfolio (Earnslaw) which consists of only 12 ETFs and is the vehicle in which we manage our retirement funds, is up 26% since the start of the year. Subscribers are privy to the holdings, weightings and trades prior to us executing them.
