The junk bond market rebounded a bit on Tuesday, but big questions remain about what the recent rout means for the stock market and the broader economy.
One of the largest junk bond investment funds (inelegantly called the iShares iBoxx High Yield Corporate Bond exchange-traded fund) was up 1.5 percent after two consecutive days of steep losses.
Junk bonds are sold by companies with less than perfect credit. Because they're riskier, they typically pay higher returns. That makes them especially attractive to investors during periods of low interest rates, like now.
But with the global economy slowing and prices of oil and other commodities tumbling, there's been growing concern about whether companies can pay back what they've borrowed.
On Thursday, Third Avenue Management liquidated a fund that concentrated on junk bonds after too many investors tried to withdraw their money at the same time. A second firm also suspended redemptions from one of its funds the following day.
Those moves intensified fears among investors about the health of the market as a whole, The Wall Street Journal reported:
It's unclear what the junk bond downturn means for the broader U.S. economy.
Big downturns in the market have sometimes been followed by larger economic collapses, such as the 2007 rout that preceded the subprime mortgage crisis by several months.
Could the same thing be happening again?
"I don't think so, but I don't think we know," said Peter Fisher, senior director of BlackRock's Investment Institute, in an interview with CNBC Monday.
Normally, the kind of an uptick in default rates seen recently would indicate a recession is around the corner, he said. But this time around, Fisher says much of the slide in junk bonds has been concentrated in the energy markets:
"It's going to be really uncomfortable in the short term," said Mohamed El-Erian, chief economic adviser at Allianz, also on CNBC. "And it will have bad spillover effects, but that's what creates opportunities over the longer term."
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