The SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the second-largest high-yield corporate bond exchange traded fund, is off 4.5% year-to-date, but with plenty of bad news baked into these and other junk bond ETFs, it could be time to revisit the asset class, particularly with oil prices rebounding.
The oil and gas sector makes up the largest percentage of distressed debt at 37% after the plunge in crude oil prices weighed on profits and added to uncertainty for the sector ahead. Meanwhile, metals, mining and steel are also under pressure, with a 72% distress ratio, due to falling demand for industrial metals, notably from China and a weakening global economy. [Rising Default Risks in Junk Bond ETFs]
Among the weakest areas in the debt market, oil and gas sector makes up 34 of the lowest-rated credit issuers with negative outlooks in December. Additionally, financial companies were a close second, with 33 of the weakest links, according to the S&P. However, some traders advise a cautious approach to JNK and junk bond ETFs.
“JNK has been in a downtrend during the past 12 months, but the decline started around the middle of 2014 (look at the longer-term chart below). Prices are well below the bearishly aligned 50-day and 200-day moving averages. The On-Balance-Volume (OBV) line maintains its downward sloping trend. There is a three-month bullish divergence between the lower lows in price and higher lows on the momentum study, but prices of JNK continue to decline despite this divergence,” according to TheStreet.com.
According to ratings agency Standard & Poor’s, the number of companies with the lowest credit ratings and negative outlooks increased to 195 in December, the highest level since March 2010, reports Matt Krantz for USA Today.
While some would argue a bullish case for junk bond ETFs, the charts for JNK reveal something different in the eyes of some technicians.
“We cannot find anything constructive about this longer-term chart of JNK, above. The downtrend is in control and prices look to be headed to $30 or lower — the next round number and what could offer possible support. Our advice? Don’t fight the tape,” according to TheStreet.com.
SPDR Barclays High Yield Bond ETF
Tom Lydon’s clients own shares of JNK.