Are Stocks Ignoring the Bond Market’s Warning?

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After gaining five consecutive years and gaining nine out the past 10 years, the U.S. stock market is on a roll. And while it’s easy to become complacent, warning signs are already showing up in the bond market.

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The chart below illustrates how risk appetite in the bond market is shifting away from high risk to safety by favoring top credit graded U.S. Treasury debt (NYSEARCA:TLT) versus lower rated and speculative debt. The PowerShares Senior Loan ETF (NYSEARCA:BKLN) has an average credit rating of BB and the SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK) has an average rating of B while the iShares Barclays 20+ Year Treasury ETF has an average credit quality of AA.

The message couldn’t be more clear: bond investors are becoming more defensive.

For now, the overall U.S. stock market (NYSEARCA:VTI) is ignoring the major retraction in risk appetite happening in the bond market (NYSEARCA:AGG). But in time, this too shall pass.

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