As has been widely documented, high-yield corporate bond ETFs have been getting pounded in recent sessions as stocks slide.
Over the past week, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) were among the least popular ETF trades, experiencing $1.3 billion and $496 million in net outflows, respectively. The losses from HYG were the biggest since October 2016, Bloomberg reports.
HYG, the largest high-yield corporate bond ETF by assets, is in poor technical shape, a notable trait when considering history shows the fund often continues struggling when it slides below its 200-day moving average. HYG currently resides about 2% below that key technical indicator.
“We see a potentially significant bearish tell from the action around HYG’s 200-day trendline. Namely, after numerous ‘holds’ at 200-day support since mid-2016, the aforementioned breach of this trendline has been followed by multiple failed retake attempts,” according to Schaeffer’s Investment Research.
HYG’s underlying index, the Markit iBoxx USD Liquid High Yield Index, also requires holdings to have at least $400 million in par value, and the debt issuer must have at least $1 billion in total debt outstanding. Due to their similar focus on liquidity, the two high-yield bond ETFs have similar portfolios.
HYG more closely tracks its underlying index as the fund accurately reflects the prices available to the fund – mew bonds are added to the index at the ask but are subsequently priced at the bid, which helps reduce the gap with its index, but this also reduces the index’s return.
“Further, the 200-day moving average is trading just south of $88, which has been significant in and of itself, halting HYG rally efforts in both November and January,” notes Schaeffer’s. “This level also corresponds to significant call open interest at the newly front-month February 88 strike, with an ample 60,664 contracts outstanding. It should also be noted that former peak put open interest of nearly 140,000 contracts at the January 86 strike just expired, as did a healthy 80,000 January 87-strike puts, removing a potential layer of options-related support in the short term.”
For more on bond ETFs, visit our Fixed Income category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.