What's going on?

When an investor loans money to a company or a government, the investor is issued a �bond.� Depending on who borrows money, bonds can have different risk levels. Right now the riskiest bonds (called �junk bonds�) are dramatically losing value � which could be an indication that things are about to get a lot worse for the stock market!

What does this mean?

As with most investments, with greater risk comes higher�potential returns. That�s why investors who are targeting higher returns might invest in risky “junk bonds” (although not all investors realize quite how risky they can be). Right now, lots of investors are trying to sell their junk bonds. That�s because they are getting increasingly nervous that companies won�t be able to repay the money they borrowed. The weakness in the energy sector is causing a lot of the problem, but the pain is spreading to other companies as well. Junk bonds, on average, have performed significantly worse this year than the stock market: they’re�down 11% versus US stocks which are flat.

Why should I care?

For markets: Junk bonds might be trying to tell us something. If a company is profitable, it is able to pay back its debt and its stock goes up (for a struggling company, the opposite occurs). As a result, the value of junk bonds and stocks should, generally, move in the same direction – which isn�t happening right now! One famous investor says US stocks are �whistling through the graveyard.� Others, like Goldman Sachs, say junk bonds are giving a �false recession signal.� It isn�t clear yet who�s right.

For you personally: Lots of investors bought “junk bonds” in recent years. Many probably didn�t realize the increased risk they were taking on (the word �bond� can give investors a false sense of comfort sometimes). The high payouts that junk bonds offered attracted investors. But right now, those investors are being reminded why higher yield usually equals higher risk.