Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Everyone loves to hate the latest rally in U.S. stocks. But junk bonds, which are often thought of as a leading indicator for stocks, are suggesting that the despised rally can continue easily.

While the Standard & Poor's 500 has climbed to records recently, dollar-denominated high-yield bonds have rallied even more. You can see this based on monthly returns:

Golden Junk
High-yield bonds have outperformed U.S. stocks this year on a total return basis
Source: Bloomberg, S&P, Bank of America Merrill Lynch index data

Or check out how much cash the securities are paying holders regularly. While the earnings yield on the S&P 500 has shrunk as stock prices have climbed, yields on junk bonds have plunged even more. 

Bond Boom
Junk bond yields have fallen faster than a comparable measure for the S&P 500 this year
Source: S&P 500 index, Barclays U.S. Corporate High Yield Yield to Worst index

The gap between the two measures of yield have shrunk to the least since September.

Yield Plunge
While U.S. stocks are reaching record highs, junk bonds are rallying more
Source: Barclays US Corporate High Yield Yield to Worst index, S&P 500 index, Bloomberg

It's easy to chalk this up to the abundant central bank cash that is sloshing around the global financial system, propping everything up in its wake. Indeed, the incredible gains seem to have little to do with fundamental strength in the underlying companies. The best-performing U.S. stocks are ones that Wall Street thinks are least promising, according to Bloomberg News reporters Oliver Renick and Bailey Lipschultz. Meanwhile the U.S. junk-bond default rate just reached the highest in at least six years.

But no worries. As long as central bank money is keeping everything afloat, everything is awesome.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net