Investors have been pulling out of high-yield bond exchange traded funds, along with other riskier segments of the market, but speculative-grade debt could turn around from here.
Some traders, though, don’t see the recent pullback as a cause for concern.
“I say put these warning signals aside, I’m going to continue to trade the market to the long side.” Todd Gordon, of TradingAnalysis.com, told CNBC.
A number of factors have been weighing on the riskier asset. For instance, the selling in commodities, transport stocks and Chinese stocks have contributed to risk-off sentiment. The selling pressure has pushed stocks back down to the moving average.
“The stock market has merely done a mean reversion,” Gordon added. “The moving average has been rising, 2015 has been consolidation with no real downside movement.”
Additionally, looking at a three-year chart of HYG, Gordon points out that HYG is nearing a support level created through a double bottom of about $86 – HYG is currently trading around $87.3.
David Seaburg, head of sales trading at Cowen and Company, argues that the high-yield bond decline has already been priced into the equities market as mining, metal and energy companies are trading near 52-week lows. A good chunk of the junk bond ETFs are also exposed to these sectors. For instance, HYG holds 13.6% energy and 5.7% in basic industry.
“The equities have already been hit following the high-yield,” Seaburg said on CNBC. “I don’t think we’re looking at a signal that we’re going to see a dramatic selloff at all.”