Junk Bond Alpha 

Junk bonds are highly "trendy."  That is, once a direction is established, it tends to continue.  This trendy behavior is long-standing and statistically significant.

One effective measure of trend status is our "moving alpha," which tracks excess return of the Merrill Lynch High-Yield bond index.  Alpha is effective in this role because it excludes some components driven by covariance with other assets.

When this alpha crosses negative, it stays negative for about 25-35 days.  When it crosses positive, it remains positive for 60-70 days (three months) on average.

Back in 2008, the junk alpha crossed negative on June 23, after having been strictly positive for 57 days from April 2.  The junk bond index was up +2.72% over that time, having reached to +4.63% before retreating.  At October 3,  the junk index was down -14.02% in the months since alpha crossed negative.

The junk alpha crossed positive on March 19, 2009.  Since then (to May 7), the junk bond price index is up +18.6%.

High-Yield Bonds: Alpha Turned Positive March 19...

Current alpha (+1.434 on May 7) is the most positive on record (since 1990)

Junk Alpha Performance--Five Years to October 2008

The DejaVu table below compares returns for all days when moving alpha was positive ("Qualify" column) vs all days when alpha was negative ("Non-Qual" column).  Alpha was positive 919 days, and negative for 337days over these five years.  Positive alpha occurred 12 separate times and lasted 77 days at a time, on average.

During those 12 positive-alpha spans, the junk bond index returned +10.98% annualized.  During the 12 negative-alpha spans, the junk bond index returned -14.30% annualized. 

The difference in mean daily rate of return between positive and negative alpha conditions is statistically significant at almost any threshold.  The ".000" significance says that given these variances and sample sizes, the probability of the observed difference in means arising by chance is essentially zero.

5-Year Moving Alpha Performance ("Qualify"=positive alpha)

To request update graphics or analysis update on the junk bond alpha, leave a message at the Contact link below, and we'll be in touch within one business day.  Or call directly at (603) 643-6430.