Bonds Tied To Stocks Top Others --- Junk Bonds Outshine Treasurys, Reversing Recession Theories
NEW YORK -- Bonds that take their cues from the stock market are leading the midyear performance charts and challenging some long-held theories about how bonds should perform in a recession.</br></br>Corporate junk bonds leaped 20% in the first half, says Merrill Lynch & Co. Bonds convertible into common stock rose 15%. Both types of bonds threw off the doldrums of 1990, when they had full-year declines of more than 4%.</br></br>But Treasurys, municipals and other government bonds rose only 2.3% to 4.2% during the first half, using Merrill's yardstick of total return, or price changes plus interest payments.</br></br>That's not the way the bond market is supposed to behave during an economic slump. The conventional thinking among economists held that the recession would bring down interest rates, wring out inflation and trigger a bond market rally, sending prices of Treasury bonds sharply higher. Junk bonds had been expected to slide further, dragged down by declining corporate profits and rising bond default rates.</br></br>Instead, junk is starring, and safety is boring.