Junk Bonds: A Replay of the Past?

September 13, 2014

by Chris Kimble

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For a period of time around from 1997 to 1999 & 2005 to 2007, the Pimco High Yield fund (PHDAX) found it difficult to move higher, creating a series of level highs. At the same time it created a series of higher lows. Once old support was tested as resistance and it failed to move higher, large declines in junk bonds and the stock market took place.

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Over the past couple of years, the fund may have created a pattern that looks similar to 1999 & 2007, as it seem to have trouble getting above the highs hit in 2007.

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The chart below of the B of A/Merrill Lynch high yield adjusted spread highlights that when sharp rallies took place in 2000 & 2007, stocks turned soft.

It might pay to keep a close eye on the Pimco high yield fund and the adjusted spread for the next few weeks to see if any important messages come from the junk bond complex.

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