Hanging Out With The Junkies by Hector Landazabal
Assuming that some bond and equities markets are highly correlated and that bonds affect the equities markets, could we extract information from junk bond markets in such a way as to manage our exposure and protect and increase our trading capital in volatile times? Here is one technique that can be used to accurately predict and identify impending market corrections.
Bonds constitute a big chunk of the credit markets, with an outstanding US bond debt of more than 30 trillion dollars. Bonds come in many flavors with different credit risk profiles (treasuries, foreign, corporate, municipal, TIPS). As most bonds have predictable income, generally dependent on current interest rates, they are considered a conservative, low-risk investment. However, corporate bonds (issued by companies) expose the investor to additional variables in-cluding economic, liquidity, taxation, and inflationary risks. Investors with an appetite for higher yields can, and do, invest in these vehicles ...