The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has been a decent performer, but charts say the largest high-yield corporate bond ETF could soon be facing some important technical tests.

Income-minded investors have plunged back into junk bonds in search of yields as rates declined in response to heightened demand for safety and the Federal Reserve’s looser monetary policy outlook. The Fed is even widely expected to cut interest rates by another quarter percentage point at its upcoming meeting this week.

“Schaeffer’s Senior Options Strategist Bryan Sapp just pointed out that the HYG is trading near a trendline of higher lows that has proven to show when it’s a good time to go long stocks,” according to Schaeffer’s Investment Research.

HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality.

Highlighting HYG

While yields on junk bonds are at record lows, speculative-grade debt and high-yield bond ETFs have seen overall maturities shrink, which have caused some to see value in this segment of the fixed-income market.

In the investment-grade corporate bond side, companies have tried to lock in low borrowing costs for as long as possible, raising the average time until their bonds mature, reports Sam Goldfarb for the Wall Street Journal.

HYG’s “40-week moving average is now moving up alongside this trendline, as well. What’s more, the ETF’s chart pattern from there gets even more bullish, since Sapp noticed it’s formed an ascending triangle pattern,” notes Schaeffer’s.

Related: Shrinking Durations Make High-Yield Bond ETFs More Attractive 

On the other hand, speculative-grade debt isn’t expected to last as long since they can be redeemed or called before maturity. Companies are increasingly likely to follow this route to replace older bonds with new, lower-coupon debt.

“It’s not a direct correlation, but generally an upward move from HYG is good for stocks. Considering that, you can take this as at least one positive sign that stocks could be in store for another push higher in the coming weeks,” according to Schaeffer’s.

For more information on the fixed-income market, visit our bond ETFs 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.

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