Via Investment Research Dynamics
Are you prepared for impact? One of my readers alerted me to the fact that someone bought 15,000 January 2016, 80-strike puts on the HYG high yield bond ETF. That’s a $1.6 million cash bet on an event that has not occurred since July 2009.
The high yield bond indices are rolling over quickly. As the graph below shows, after the QE-driven big bounce from the 2008 collapse in the financial markets, the high yield market has largely drifted sideways since the middle of 2010. Energy bonds represent about 15% of the high yield market. But the junk bond market actually began slowly rolling over a full year before the price of oil collapsed:
You see that the junk bond market, as represented by the HYG ETF, peaked in July 2013. The price of oil began to drop like a rock in mid-June 2014. This event didn’t seem to infect the junk bond market until early July 2014.
For a lot of reasons, the high yield market is a lot more sensitive to changes in the financial and economic condition of the system than are stocks. From the graph above, you can see that HYG is down 12.5% from its peak in 2013. At that point in time, the S&P 500 was still on its way to an all-time high. More than half of the 12.5% drop in junk bonds has occurred since the spring of 2015.
Continue reading “Ominous Signals Coming From The High Yield Market”
