Recent weakness in high-yield bond exchange traded funds is a worrying sign for U.S. stocks. The junk bond ETFs are testing the 200-day exponential moving average after a rough start to the second quarter, while one technical analyst sees a bearish pattern forming.
Some investors keep a close eye on junk bond ETFs such as iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) as a sentiment indicator for how comfortable investors are with taking on risk. [What High-Yield Bond ETFs are Saying About Stocks]
The high-yield funds are testing the key 200-day moving average for the first time this year.
“As high-yield credit is highly correlated with equities, it’s hardly surprising that the asset class has rallied sharply since fall lows, taking part in the strong rebound in stocks and other risky assets,” said Russ Koesterich, iShares global chief investment strategist, in a recent commentary.
Junk bond ETFs have been extremely popular with investors exploring other asset classes in their search for yield.
JNK and HYG are currently yielding more than 7%, while yields on the 10-year Treasury note are hovering just north of 2%.
Chris Kimble at Kimble Charting Solutions on Monday said “some softness is taking place” in JNK, as well as a potential head-and-shoulders top.
High-yield bonds have been “great tools to help call major tops and bottoms,” Kimble wrote in an investment newsletter. He said to watch for warning signs in junk bond ETFs if they’re weak on days when U.S. stocks are rising.
SPDR Barclays High Yield Bond
