Junk Bond Market Says This Correction Is Different from 2008

On Monday, bond investors may have said we-told-you-so, but they also tacitly gave investors reason not to worry too much.

The WSJ noted that corporate-bond markets had been showing signs of weakness ahead of the plunge in major stock indexes in recent days—similar to the warnings signs the credit markets flashed ahead of the stock market drops of 2000 and 2008.

But the response in credit markets, particularly in the junk-bond markets, on Monday diverged wildly from the response among credit investors in 2008. Junk-bond investors were largely calm Monday, and trading volume was relatively low, according to several traders.

On Monday, junk-bond prices dipped to 94.4 cents from 95.3 cents Friday, a drop of less than 1%, according to Barclays data. Yet the Dow closed down 3.6%, at 15871.35, and the S&P 500 dropped 77.68 points, or 3.9%, to 1893.21. The closing prices of the stock markets, while down sharply, masked the extreme intraday swings in the indexes.

That contrasted with the relatively quiet day of trading in the bond markets Monday.

In 2008, bonds sold off in the weeks and months leading up to September 2008, but the sell-off intensified as the stock market cratered.

On Sept. 15, 2008—when Lehman Brothers Holdings Inc. filed for bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp—junk-bonds dropped by 5%, according to Barclays figures. Several traders recalled the panicked, high-volume selling on the days of the major stock market sell-offs in 2008.

On Oct. 10, 2008, after the Dow dropped more than 7%, junk bonds dropped by more than 5% to 65.6 cents from 69.2 cents the previous day.

Another key difference: The fall off in the junk-bond markets been concentrated in a few sectors, whereas in 2008, nearly all sectors saw junk-bond prices drop dramatically.

For example, in August so far, the S&P U.S. High-Yield Corporate Bond Index is down 2.7%. Most of that fall is attributable to a slide in junk-bond prices in the energy sector, which are down 9.3% for the month. Materials and telecom fell roughly 2.7% and all other industries dropped less than 2%.

In September 2008, the S&P U.S. High-Yield Corporate Bond Index fell 7%, but several industries including energy, consumer discretionary, consumer staple, financials, telecom and information technology were down more than 5%.

“In 2008, the problems were much more widespread than they are now,” was more widespread than right now,” Kevin Horan, the director of fixed income indices at S&P Dow Jones, said.

Correction: An earlier version of this article stated Lehman’s bankruptcy filing date as Sept. 16, 2008, instead of Sept. 15, 2008.