The trends of the junk bond and stock markets tend to be correlated.
The reason why is that junk bonds and stocks are closely affiliated in the pecking order of creditors in case of default. The rank of junk bonds is only slightly higher than equities because debt involves a contract.
Given these two markets are usually correlated, it’s worth paying attention when a divergence takes place. Indeed, a divergence is in the works now. In other words, while stocks have been holding up, the price of junk bonds have been trending lower for much of the year.
