Junk bonds suggest US stocks may have further to run

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U.S. stocks just wrapped up their best quarter in nearly a decade, coming within a stone's throw of a record high.

Junk bonds did them one better, regaining record levels and then some. Given the long-running correlation between the two asset classes, that could mean stocks will soon be back in record territory as well, keeping alive a bull market run now stretching into its second decade."We think this cycle has a lot more time than think," said Krishna Memani, chief investment officer at Oppenheimer Funds."It's not ending in 2019 and it's not ending in 2020.

While the two frequently move in lockstep, junk bonds have often taken the lead in demarking major turning points or signaling that both sectors may be heading into uncharted territory.A decade ago, for instance, high-yield bonds began their rise from the financial crisis more than two months before the S&P 500 and the Dow Jones Industrial Average found their bottoms.

In that context, some investors are skeptical that financial and economic conditions will provide sustained support for a run-up in stocks. Still, equity markets are flashing green, and market volatility, which rises when investors are anxious, is not far off last fall's lows when stocks were last at a record.

Credit spreads, or the amount paid to investors above Treasury yields to compensate for holding riskier debt, are also cause for optimism.

 

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