High yield bonds anticipates the market
Let’s analyze another aspect of ‘high yield bond‘.
As we have already explained, you can take advantage of the behavior of this kind of bond by investing on these bonds directly or by considering them a signal that anticipates what could happen on the stock market.
They have a direct connection with the stock market and their trend is not correlated with the bank rate. Why?
The bond’s value rises when the market expects that debt issuer companies improve their budget producing more profit.
The interest that these companies will pay to the new bond holders will be lower because the bonds will be safer.
If companies increase profits it means that the economic cycle is positive, therefore the stock market is set to rise too.
But when the brokers sense that the profits of these companies will be lower and the risk for the bond subscription will increase, they will ask for more interest. There will be a sudden bond value drawdown.
If companies make less profits it means that the economic cycle is weakening and consequently the stock market will became a bear market.
The fall of high yield always anticpate the stock market fall.
As you can notice by the comparison of the last 25 years the high yield bonds (blue line) always anticipate the S&P500 (black line) fall.
Is it time to buy them now?