INTEREST RATES AND MARKET BEHAVIOR

Secondary market bond prices move in the direction opposite interest rates. Whether interest rates go up or down depends on many factors, including the policies of the Federal Reserve.

However, junk bonds are less affected by interest rates than other bonds are. This is because they have higher yields and shorter maturities. Interest rates are apt to change less over a shorter period. The market behavior of junk bonds is more in tune with overall changes in the economy, such as a recession.

Junk bonds tend to act more like stocks in their market behavior than other bonds. This is because the strength of junk bonds is connected to the strength of the company that issues them. In a recession, when interest rates fall, junk bonds might also fall in value because the companies issuing them earn less and are unable to pay off their debts. A rise in company revenues is more important to the health of a junk bond than interest rates. A strong economy means fewer defaults and more junk bonds that are successful.

Likewise, junk bond prices depend more on the overall health of the U.S. economy than higher-graded bonds do. When the stock market is doing well, companies can replace debt with equity, lessening their chance of bond default and possibly increasing bond prices.