High-yield bond exchange traded funds have bounced back a bit since being slammed in the second-quarter due to speculation the Federal Reserve would move to taper its quantitative easing program.
Although obituaries for the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) have been written a few times this year, JNK is higher over the past month and three months. Since the start of October, JNK has raked in over $572 million in assets. [Junk Bond ETFs Loving a No Tapering World]
JNK could be ready for a breather and that could mean the same for stocks, an asset class often highly correlated to high-yield bonds.
“JNK hit its Fibonacci 61% retracement level again and looks to be heading lower, as it breaks support of the rising wedge pattern above. The two peaks in JNK this year, which took place in May and July, also ended up being times when the S&P 500 took a little breather as well,” said Chris Kimble of Kimble Charting Solutions.
“Sometimes Junk Bonds can send key message about the stock market, per important rallies and declines, will this be another one? Is the weakness in Junk bonds of late any kind of message to respect or just noise???,” added Kimble.
There is a decent chance, however, that stocks can move higher exclusive of high-yield bonds. Over the past year, JNK’s correlation to the SPDR S&P 500 (NYSEArca: SPY) is just 0.606, according to State Street data.
As the chart below suggests, JNK has not been tightly correlated to some of the higher beta, more cyclical sector SPDRs over the past 12 months, either.
Chart courtesy: State Street Global Advisors. ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG, JNK and SPY.
