Here’s what’s happened with Europe’s high-yield debt market since January 2022
Europe’s junk bond market is collapsing. Our August Global Market Perspective elaborates:
Europe’s junk bond craze reached its money zenith on January 8, 2022. That is when investments in the Bloomberg European High-Yield Index touched an all-time high of €492 million. Shown below, the 24-year rally traced out a reasonably well-formed impulse wave that was contained within an Elliott-defined parallel trend channel. The 2022 peak coincided also with a strong rally in Germany’s 10-year benchmark yield, which had been languishing below zero from May 2019 through February 2022. In our view, the two-and-a-half-year, 20% sell-off depicted on the right side of the chart is not correcting an old uptrend, but rather beginning a new downtrend that will eventually wreak havoc across corporate debt. Given the junk bond market’s close relationship with financial crisis, we are watching this market closely. [emphasis added]
Junk bonds are called junk bonds for a reason, and that reason typically becomes obvious after social mood waxes negative, after debtholders become fearful, and after investors begin to exit the market en masse. By that point, it’s too late to get out, because nervous bondholders dump entire portfolios of debt regardless of the individual bonds within them. As liquidity dries up, huge numbers of former debtholders discover what was true all along: they are holding large piles of … well … junk.
Well, that’s Europe. Our U.S. junk bond market is safe, right? Right?
We’re keeping an eye on these trends in our Global Market Perspective. Follow this link to learn how you can read it monthly.