Junk bonds — which make up the riskiest class of corporate debt — have often tipped off investors about future downturns in the stock market. But one expert says it's not likely to do that anymore, and he's found an alternative.
Takahide Kiuchi, executive economist at Nomura Research Institute, says he's found an alternative. He's looking at BBB-rated corporate bonds, which reside just one step above junk. Kiuchi notes the group is a"The trend in that corner of the corporate bond market may already be flashing a yellow warning light for a market correction," Kiuchi wrote in a client note.
"Investment managers who are required to invest only in investment-grade bonds would be forced to sell off these bonds and investment trusts holding them, causing a so-called fire sale," he said."This could inflict serious damage on the market." After all, widening junk spreads have preceded large stock-market drops over time. Kiuchi says that was the case in 1998, when the Russian debt crisis triggered a sharp equity sell-off. In addition, during the subprime loan crisis of 2007, junk spreads broadened 50 days prior to the eventual stock meltdown.
Source: News Formal (newsformal.com)
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