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The junk bond rally - and the whole investment grade corporate bond rally for that matter - can be looked upon from two opposing viewpoints.  The optimists will tell you that it is a sign of underlying strength in the economy, denoting the fact that US creditors are comfortable with the risks involved with lending to these companies.  The pessimists will tell you that the creditors will be proven foolish and eventually lighter in the wallets, so who cares what their willingness to lend may signal?

Below I've got a smart take from both an optimist and a pessimist on the junk bond rally and the fact that investors in the high yield market are DTF (Down to Finance):

First, here's Ryan Detrick, Chartered Market Technician (CMT) and Senior Technical Strategist at Schaeffer's Investment Research:

A perfectly reasonable, logical and historically accurate line of commentary.

But then there's this bit on how the junk rally is a massively obvious bubble, from Stephanie Pomboy (MacroMavens), who was quoted extensively in this weekend's Barron's:

Please bear in mind that Stephanie's "Hear Me Now, Believe Me Later" newsletter from March of 2006 was one of the most frighteningly prescient pieces of market forecasting ever written.  It was the ultimate spoiler alert, written in a runaway bull market no less, about how the housing bubble was going to collapse and destroy the economy on its way down.

No it is very possible, of course, that they are both right (as they would have been at the prior record low-yields for junk from back in 2005).  In that example we did, of course, get quite a solid 18 months out of both the stock market and the economy before the eventual collapse began in late 2007.  And so in in the case of 2005, both the optimists and pessimists would have been right on the high yield market and it's meaning.  Junk bonds rallying was both a sign of strength and a distant early warning about the quality of liquidity splashing about back then.

But what does the junk bond rally mean this time around?  Is the dour take from Stephanie correct or is Ryan's citation of healthy financing for junk one more sign that the recovery is still alive and well under the surface?

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