Junk bonds getting ready to collapse.

Junk bonds are debt notes which are considered not investment grade due to the high risk.  The only problem with this classification is that everyone is invested in them to the hilt.  The reason?  Chasing yields.  With the fed manipulating treasury rates so low, many people feel they have no choice but to invest in something called "junk".

Let me state it simply: Insurance companies issue annuities during good times which promise 8% annual return for the rest of your life.  Normally this is supposed to be a prudent and conservative thing to do.  But in reality it will turn out to be this: If you give them your money so that they can go gambling with it, you can have 8% of it back per annum until they BK.  Then you can stand in line at BK court with the rest of the Marks and Patsies who believed that their money should "work for them".

Pensions are in the same boat.  Pension fund managers HAVE TO have certain levels of return in order to make the pay outs to existing pensioners.  But how to earn that money safely when they need 8% and can only get 2-3% from treasuries?  This is the dilemma that the fed has put the pensions and the insurance companies into.  They basically were told, sorry, you cannot invest in low risk things.   We need to re-ignite the animal spirits of investors.  So we will arrange things so that you have to put retiree's money into risky plays.  If you don't then you will not be able to make scheduled payments and you will BK anyway.  So play along like a nice insurance/pension administrator.

Of course, those who got in for a while and then get out before the crash will do just fine. But that kind of market timing is rare, oh so rare.  If only these overpaid guys would read my blog ;  )

Well, I kind of smile but I kind of mean it too.  The chart is staring us in the face on this one.  That 5th rail bump failed and now there are 5 waves down.  That means it has peaked.

I headed over to the federal reserve data site (called "FRED") in search of confirmation.  I found this chart which I also count as having started a reversal.  The chart basically measures the difference in yields between crappy junk bonds and treasuries.  So what you are seeing here is that high risk debt is only paying a few percent more than "safe" (for now at least) treasuries.  The reason it is like this is because of high demand.  Junk bonds are in demand because treasuries pay nothing and the world is addicted to getting something for nothing via the concept of investing (cough cough gambling).  Thank the federal reserve for forcing retiree food money into the risky, corrupt world of junk bonds.

This will end badly for sure.  Junk bonds are a canary in the coal mine and with 5 waves down off the recent 5th wave peak of the ending diagonal, that canary is looking pretty sick.  In fact, the 5 waves down really confirms that he is now dead.  I don't know what else the chart could morph into now that 5 waves down are in.  Time will tell but if you want a very easy short, JNK @ 41.56 is your Huckleberry.