Source: Jin10 Data
The last time junk bond spreads reached current levels was before the dot-com bubble burst, and the US stock market subsequently entered a bear market for 30 months.
According to Bank of America, a reliable indicator of the bond market has issued a warning signal to the stock market for the first time since 1999.
The bank emphasized in a report on Tuesday that the price trend of high-risk, high-yield bonds has not confirmed the record rise in the stock market.
Bank of America said, "In recent years, high-yield bonds have progressed in tandem with US stocks, but recently, low-rated companies have underperformed even though the rise of benchmark stock indexes depends on only a few popular companies."
Since the beginning of this year, the S&P 500 index (SPX) has surged nearly 19%, while the iShares high-yield corporate bond ETF has risen 4%.
But Bank of America believes that what is more worrisome is that in a little-known corner of the bond market, ultra-high-risk bonds are going in the opposite direction of low-risk bonds.
Bank of America said the gap between the lowest-rated CCC corporate bonds and the relatively safer B-rated bonds is the largest in 25 years.
"The warning of junk bond spreads is just like in 1999." At that time, the ratio of spreads between CCC corporate bonds and B-rated bonds rose to more than three times, and it happened the year before the dotcom bubble reached its peak.
In March 2000, the dotcom bubble reached its peak, followed by a 30-month bear market in US stocks, and the Nasdaq 100 index (NDX) fell 78%.
The warning signal from the bond market, plus the uncertainty of when companies will profit from artificial intelligence, has led Bank of America to be cautious about investing in US stocks. The bank said it prefers value stocks over large tech stocks.
Bank of America said, "We expect US households to profit from large tech companies in the second half of 2024. However, the credit market has not confirmed the rise in stocks and investors are becoming increasingly impatient with artificial intelligence."
Editor/Lambor