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Junk Bonds Versus Government Bonds: Why It Matters

Published 22/06/2024, 05:25 am
JNK
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TLT
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When stocks are in a bull market, we tend to see assets like growth stocks and junk bonds perform well as investors are in “risk-on” mode.

And oftentimes, these are the assets to start underperforming when the stock market goes through a sell-off or correction.

Today, we pit one of these assets (junk bonds via the SPDR® Bloomberg High Yield Bond ETF (NYSE:JNK)) against its counterpart government bonds via the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT). And we do this using a weekly price ratio chart.

JNK Vs. TLT Weekly Chart

As you can see, the ratio sent a very bearish message to TLT back in 2020 as JNK began outperforming TLT. And this has also coincided with a big equity bull market.

Fast forward to today, and we can see that the ratio formed a double top at (1) and is breaking down through up-trend support.

So I humbly ask, is the ratio now sending a bullish message to TLT? While simultaneously sending a potentially bearish message to equities? If support gives way at the neckline of the double top at (2), I suspect that it is. Stay tuned.

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