E Is High Yield Signaling An All Clear?

In case you haven't noticed, the high yield bond market has been rejuvenated lately to unbear-like behavior.The HYG high yield corporate bond ETF is actually up more than the Dow YDT, putting it ahead of about everything except utilities and gold. The inflows into these bonds have been looking up recently as an article  “High Yield Market Technicals” just out by AdvisorShares points out.

Why Care About High Yield Bonds If You're A Stock Investor ?

Why is this important? I watch this because one of my principle maxims is that the credit market leads the equity market.It usually is the early warning for any major change in market complexion.I watch bonds mainly for early warning on downturns, because the warning is typically very early and pronounced. But high yield also tends to turn up ahead of stocks at the end of declines too.If you look at HYG vs SPX in the September, 2008 to March, 2009 time frame, you see HYG not making a new low on March 9 and getting back to pre-crisis levels much sooner than stocks.

So is this more risk sensitive area of debt showing a turn for the better? Well, for all of 2015, this area experienced a $7.1 billion net outflow of funds whereas just the first three months of this year saw a $6.1 billion inflow! That is a strong turn, especially considering that commodity prices, the predominate affliction with high yield, remain very weak and are not making any such big turn.  But to see if the debt market is really signaling any big turn up, we have to step back a few paces and look at this 15 month change in fund flows in context: 

Here we see the market leading nature of the Russell leading the Dow downturn and the debt market leading the Russell. Debt made the bear turn a year before the small caps of the Russell, and the leading small caps have not rallied to anywhere near new all-time highs as the Dow has done. I wrote a whole article on these megaphone formations as they have been a feature of every major US bear market since 1850. The graph above suggests that the good year high yield flows are having so far compared to 2015 is just a bear rally in the bigger picture. However, HYG is at a critical juncture now, and if it were to do a convincing break-out from the down-trending progression shown above, it would likely be our first good clue of a positive stock market ahead.

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