As speculative-grade debt and related junk bond exchange traded funds continue to weaken, some worry that the risk-off mentality will seep into the equities market.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has fallen 1.7% over the past month while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) has decreased 2.0%.
“Equities are unlikely to rally in the midst of substantial a high-yield selloff,” one hedge-fund manager who focuses on the credit markets said on CNBC. “There will be a correction at some point,” he added, “whether it just started, or in the next six months.”
More hedge funders are concerned that some businesses are experiencing bubble-like valuations after the easy-money policies helped fuel market gains.
“Financial asset prices are artificial, the equilibrium is temporary, the lack of volatility is a trap, and when the whole thing bursts, there will truly be hell to pay,” Elliott Management said. “Investors are ‘seeking yield’ now in assets of lower and lower quality, with more and more leverage, and with less and less yield to compensate for risk.”