Thursday, September 24, 2020

"Junk bond jitters may signal the start of a stock market capitulation" (JNK; HYG)

From MarketWatch, September 23/24:

High-yield weakness often a canary in the coal mine 
Investors worried about recent turbulence in stocks may want to keep an eye on the near $1.5 trillion high-yield corporate bond market, to help gauge when a more substantial selloff in Wall Street might begin.

Analysts often view ructions in the high-yield, or “junk-bond,” market as a canary in the coal mine, or an early warning to when investors might start taking flight from riskier assets altogether.
Key drivers of recent jitters have been a brewing fight over the next Supreme Court judge, dimming prospects for another fiscal stimulus package, the potential for a contested Presidential election after Nov. 3 and the persistence of the COVID-19 pandemic — all threatening to crack the foundation of the market’s recent gains.

The logic behind why investors should watch high-yield for signs of trouble has been that junk bonds typically are sold by America’s most indebted companies, leaving holders of such debt vulnerable to shifting expectations around the U.S. economic recovery.

That’s why during Monday’s sharp stock selloff, market participants fixated on sharp outflows in the high-yield sector as a sign that things could easily get uglier in the months to come.
Specifically, the biggest exchange-traded fund focused on sub-investment grade debt, the iShares $ High Yield Corporate Bond fund, HYG, -0.09%, was hit by nearly $1.06 billion of outflows on Monday, the largest single-day outflow since the start of the pandemic.

“Our sense is that further HYG weakening would be the confirming signal of real risk aversion,” said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group, in a Tuesday note....

The two largest junk bond ETFs via FinViz:

JNK SPDR Bloomberg Barclays High Yield Bond ETF daily Stock Chart
HYG iShares iBoxx $ High Yield Corporate Bond ETF daily Stock Chart