“With increased leverage comes the increased probability of default and bankruptcy,” he added. “In the grand scheme of things, risk equals return, and the high yield of these bonds is designed to compensate investors for this risk.”
High-yield funds have been great assets to own when above key moving averages, as well as a fairly reliable indicator for stocks, Kimble said. He noted the category peaked in 1998 before the broad market started its decline from 2000 to 2003. “They started heading lower in 2007 before the broad market and put in a low in the fall of 2008, before the broad market did in March of 2009,” Kimble added.
With high-yield funds crossing below the 50-day EMA and the steep support line breaking, they are “sending a ‘note of caution’ to the equities marketplace, that hasn’t been sent in months,” he said in a recent blog.
iShares iBoxx $ High Yield Corporate Bond Fund