High-yield bonds and the exchange traded funds that hold those bonds are viewed by professional investors and traders as accurate gauges of market risk appetite.
The conventional wisdom is that although bonds as an asset class are generally considered to be income generators, the opportunity for capital appreciation gives junk bonds some equity-like characteristics. If that is indeed true, some marquee high-yield bond ETFs have been laggards as U.S. equities have risen over the past year.
The SPDR S&P 500 (NYSEArca: SPY) is up more than 21% in the past 12 months, but the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest U.S. junk bond ETFs by assets, are each just over 4%. That despite fairly intimate five-year correlations between HYG, JNK and SPY. [Junk Bond Issuance Soars]
Chart Courtesy: State Street Global Advisors
There is evidence that HYG and JNK are about to turn for the better and that could be good news for suddenly moribund U.S. stocks.
“Its been a tough past 12-months for Junk Bond ETF’s JNK & HYG! Performance is nothing to write home about and has lagged the S&P 500 by almost 20%,” says noted technical analyst Chris Kimble of Kimble Charting Solutions. “Over the past few months bullish ‘ascending triangles’ look to be forming. Often time the price action of junk bonds is viewed a key message for what stocks will do going forward.”