Investors should keep an eye on weakness in high-yield exchange traded funds because the riskier bond ETFs have been a decent leading indicator for the stock market, a technical analyst says.
SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) and iShares iBoxx $ High Yield Corporate Bond Fund (NYSEArca: HYG) have both fallen below their 50-day exponential moving average.
“Breaking below a 50-day exponential moving average is not that concerning of a message,” says Chris Kimble, head of Kimble Charting Solutions, which specializes in technical analysis. Yet should high-yield funds and ETFs break the 200-day EMA “a very concerning message would be at hand,” he added.
The high-yield or “junk” ETFs invest in corporate debt and both funds have 30-day SEC yields of more than 6%. These corporate bonds can be more volatile than investment grade government debt.
“We consider investing in high-yield corporate bonds to be similar to investing in the equities of companies with highly leveraged balance sheets,” said Morningstar analyst Timothy Strauts in a profile of SPDR Barclays Capital High Yield Bond.