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Junk Bonds: 2 “Golden” Junctures

A recent low in the “CCC yield minus AAA yield” chart occurred very near a key Fibonacci level

by Bob Stokes
Updated: February 13, 2020

The Golden Ratio -- 1.618 or .618 -- is ubiquitous throughout nature.

You'll find this mathematical proportion in the shapes of galaxies, sea horses, pine cones, the arrangement of seeds on a sunflower head, and numerous other natural phenomena... including the chart patterns of financial markets.

Yes, chart patterns of financial markets are also parts of nature, because they're created by the interactions of human beings.

Moreover, the Golden Ratio is highly useful in setting price targets and forecasting key junctures in those price charts.

Indeed, Murray Gunn, Head of Global Research at Elliott Wave International, mentioned the Golden Ratio in his analysis of the junk bond market in our February Global Market Perspective. Here's a chart and commentary:

CCCYield

The chart shows the yield of CCC-rated corporate bonds minus the yield of AAA-rated bonds, each denominated in U.S. dollars. Junk bonds (the CCCs) underperformed in the second half of 2018 and the subsequent retracement in the yield spread reversed around the [Fibonacci] 0.618 (inverse of 1.618) retracement in May 2019.

Another period of junk underperformance ensued into the beginning of December 2019 from where the spread contracted into last week's low. That low, curiously, was within 4 basis points (0.04%) of the 0.618 retracement of the rally from May to December.

In our February Global Market Perspective, Murray also indicates what he expects next for high-yield bonds.

Right now, wave patterns in junk bonds are telling the story with implications for the broad bond market as well as stocks and more. Discover what it is, and tap into more of our global financial insights with no obligation for 30 days.

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