Stock Crashes and Corporate Bond prices?

[The following is for specific corporate bond prices, not bond mutual fund prices.]

How do stock market crashes effect corporate bond prices? (For existing bonds which are being traded regularly.)

Theory 1. Corporate bond prices go up because everyone is moving their money to bonds?

Theory 2. Corporate bond prices go down because many people need to meet margin requirements and must sell their bonds?

Another theory?

In partial answer to my own question, I guess the corporate bond prices are subject to "panic from the masses" as well - Not directly, rather indirectly via bond mutual fund outflows???

I found this...

["NEW YORK, Aug 18 (LPC) - Investor sentiment has taken a more muted tone this week after high yield bond and bank loan mutual funds last week registered massive outflows of $3.4 billion and $1.5 billion, respectively, sources said."]

Full Story...
http://www.reuters.com/article/2011/08/18/us-fund-flows-idUSTRE77H5Y020110818

If you look at a graph of corporate yields (a typical basket of say 5yr BBB bonds), you will find that they tend to match the action in equities pretty well. You can find the data from FRED or Economagic I'm sure.

Going into more detail, there are two scenarios to outline here; in a genuine crash, all asset correlations approach one. Everything is sold - stocks, bonds, commodities, the lot. So rules of thumb that you might expect to occur are defenestrated.

In phases of general risk appetite/aversion, however, stocks and corporates are pretty well linked. Often you will hear people say that corporates lead eqiities, because bond traders are (apparently) generally smarter than equity traders, but you will have to investigate that yourself.

Although you might expect the bonds to appreciate relative to the stock in times of uncertainty, the flow of funds is not necessarily from the equity marketspace... that is, the majority of the flow won't be stocks -> corporates; in a sell off, the stock holders will rotate into cash or defensives, while bondholders will move into higher graded corporates or treasuries, depending on their mandate. So while it is certainly possible for an investor to decide to move their exposure to a particular firm from being an equity holder to a bondholder, this would be in response to a firm-specific event, rather than a market-wide sell off.

HTH.

yellow4yield said:

[The following is for specific corporate bond prices, not bond mutual fund prices.]

How do stock market crashes effect corporate bond prices? (For existing bonds which are being traded regularly.)

Theory 1. Corporate bond prices go up because everyone is moving their money to bonds?

Theory 2. Corporate bond prices go down because many people need to meet margin requirements and must sell their bonds?

Another theory?

Click to expand...

that's a pretty deep question

never given it much thought but it seems logical corporate bond prices should go down as share price dips because investment in bonds carries more risk. then again bonds are more secure than equity instruments because the company actually owes you something rather than you being a contributor in order to share in future profits regardless of how likely they are.

this all depends on how good the market is at pricing companies/risk so the relation probably only holds in the long term (10 - 20 years)

any journal articles on the subject? google scholar time!!!

http://www.jstor.org/pss/1831029 bang... it's options but you can assume option yields and prices move for the same reasons stock prices do for the sake of argument

http://www.sciencedirect.com/science/article/pii/030439329290042Z it's about bond yields but bond prices are a function of bond yields

that's enough lol