With all the euphoria in the market, junk bonds help calm the noise.
Why?
Because firms that issue bonds are generally looking to raise capital for growth, expansion, debt restructuring or other cash-flow for their business.
Companies that issue high-yield bonds share one common characteristic — a high debt load relative to business income and cash flow.
Hence, junk.
These bonds are great in a risk-on environment as they have higher interest rates than their investment-grade corporate and government counterparts.
When conditions are risk-on, investors looking for better return on fixed-income investments seek out high-yield bonds to stay ahead of inflation and maintain purchasing power.
However, in a risk off environment, they can be even riskier and often flash a warning well ahead of equities or even other bond markets.
Currently, HYG could be flashing a warning.
Looking at the chart,
Click here to see more on HYG, plus levels for key ETF indices and sectors.
HYG had a huge volume spike on Tuesday. The red bar below shows us that volume rose while the price declined.
We have seen this before at the end of October, and the junk bond market survived.
The phase also changed to caution as the price is now 2 days under the 50-DMA.
This also happened recently only to see HYG return.
Real Motion is in a bearish momentum divergence to price, which again also happened at the end of October.
HYG also underperforms the benchmark.
Thus far, this is merely a head’s up, but a head’s up at a critical time as the market seems to have only upside.
Should HYG continue to decline in price on large volume, this could be a good reason to lock in money and sit tight.
Of course, a return over the 50-DMA with good volume would change this warning.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
