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High Yield Bonds: Are the Bulls in Charge?

10/19/2018 5:00 am EST

Focus: ETFS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

The current investing landscape for high yield assets is about as constructive as I could expect, explains income investing expert Bryan Perry, editor of Cash Machine.

As long as the good news for the domestic economy keeps on coming in at or better than forecast, the current rally will be sustained.

And there is always the hunt for what is going to keep the bulls in charge relative to how much good news has already been priced into the market. The notion of the Fed possibly slowing the pace of rate increases has started to gain some credibility among professional fund managers.

Bond yields and inflation are tame, and capital flows are pouring into U.S. assets. More importantly, money flow recently turned positive toward high-yield junk bond debt.

I’m not ready to pounce on a high-yield, closed-end bond fund just yet, but the tea leaves are super intriguing. Shares of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) that trade about 10 million shares per day are showing signs of trying to break out of a seven-month trading range.

chart

As high yield investors seek out the next esoteric asset or exotic instrument that will pay them a yield above 10%, we may not have to look further than the U.S. junk bond market for a well-timed investment and pay on a monthly basis. The best part of this investment proposition is that it may come together soon.

While the charts of the two most widely traded high-yield bond ETFs, HYG and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), are still bearish by definition, they’ve stopped going down and are trading in a manner that suggests the next move is higher.

If there is a technical green light, it will be evidenced by a high-volume upside move accompanied by a spike in bullish money flow and both funds will move in a highly correlated fashion.

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