The recent poor performance of junk bonds received a lot of attention last week, culminating in an article in the Wall Street Journal that asked, ‘Are High Yield Bonds the Canary in the Coal Mine?’

The two largest junk bond ETFs, HYG and JNK, saw their largest weekly pullbacks since August, falling just short of a percent each on unusually large volume.

There are several reasons for the selloff:

1. Barron’s noted that the yields simply aren’t high enough for the extra risk given the fact that we must be relatively close to the end of the current credit cycle.
2. Despite a terrific earnings season (as noted above), a number of the largest junk bond issuers had terrible earnings reports, according to Bloomberg.
3. The Republic tax plan could limit the deductibility of interest payments on corporate debt, which would hurt aggressive borrowers.
4. The Financial Times noted that technical factors may be at play as the prices for HYG are now one percent below the 200-day moving average.

These are all legitimate reasons for junk bonds to sell off, but I was a little troubled by the conclusion of the WSJ article, which asked whether the selling in junk bonds would extend to other risky assets.  Although they didn’t say it, they were clearly referring to stocks in my view.

The rest of the article, which you can read here, is a pretty straightforward analysis of the current junk bond market action that doesn’t differ much from what I covered above.  The last sentence, though, seems to have slipped past the editors since it implies much more than the facts suggest.

It makes sense to keep an eye on junk bonds, but it seems too early to get too worried about the stock market.  Of course anything can happen, but it seems to me that the rally will continue (at varying rates) until there’s a recession, which hardly seems around the corner at this point.