The major U.S. stock indices have broken out to fresh highs but high-yield corporate bond ETFs have yet to join the party as interest rates rise.
For example, the S&P 500 is up nearly 8% for the trailing three months while iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) has shed about 2%, according to Morningstar.
Since the end of June, HYG has been one of the top-selling ETFs with over $1.3 billion of inflows after the spring sell-off, according to IndexUniverse data.
HYG and SPDR Barclays High Yield Bond (NYSEArca: JNK) are barely positive for 2013 when dividends are included.
Two years ago in the summer of 2011, junk bond ETFs reflected similar weakness against the S&P 500, which ended up falling over 15% from August to October, according to Kimble Charting Solutions.
“Is JNK sending a message to respect? Is this nothing more than bond price declines in a rising interest rate environment? Will it be different this time?” the technical blog muses, adding the high-yield ETF has declined to a key support level worth watching. [Amid Rebound, Cash Pours Into Junk Bond ETFs]
In recent years, junk bond ETFs have been fairly reliable indicators of credit fears that eventually spilled over into equities.
“The S&P 500 crept to another new all-time high on Friday. Negative divergences amongst important indicators remain, so it is difficult to trust the breakout,” says Investors Intelligence analyst Tarquin Coe.
“Being August, trading volume is of course very light and that adds further skepticism,” he wrote in a newsletter Monday. “However, if the index has not pulled back to the 1587 level by mid-week, then we would have to give the rally the benefit of the doubt.”
iShares iBoxx High Yield Corporate Bond
Full disclosure: Tom Lydon’s clients own HYG and JNK.