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  • Home>UPDATE: Stock-market investors are starting to freak out about this ugly chart

    UPDATE: Stock-market investors are starting to freak out about this ugly chart

    UPDATE: Stock-market investors are starting to freak out about this ugly chart


    By Mark DeCambre, MarketWatch

    Wall Street bears are sounding alarms about a recent drop in non-investment-grade bonds, popularly referred to as junk bonds.

    The SPDR Bloomberg Barclays High Yield Bond ETF (JNK), an exchange-traded fund that tracks junk bonds, is on track to finished at its lowest level since March 24. Another well known junk-bond ETF, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) also carved out late-March nadir, according to FactSet data.

    Both ETFs fell below their 200-day moving averages early this month, signaling that momentum in fixed-income products is bearish. Technical analysts tend to follow short- and long-term averages in an asset to help determine bullish and bearish trends.

    The moves for JNK and HYG, referencing their widely used tickers, come as the S&P 500 index and the Dow Jones Industrial Average have been testing fresh highs. Normally, junk bonds and stocks are positively correlated, or move in the same direction, because junk bonds are considered a proxy for risk appetite in the market. Junk bonds had been drawing interest, particularly in an environment of ultralow bonds, with the 10-year Treasury and the 30-year Treasury bond offering yields (http://www.marketwatch.com/story/treasury-yields-inch-higher-as-wall-street-awaits-senate-tax-bill-details-2017-11-09) below their historic averages, even as the Federal Reserve embarks upon efforts to lift interest rates from crisis-era levels.

    Bonds with the highest yields tend to be the riskiest and therefore offer a commensurate compensation in exchange for that perceived risk. Bond prices and yields move in opposition.

    However, a recent divergence between junk bonds and stocks, taking hold in late October, has raised eyebrows among Wall Street investors (see chart above):

    As highlighted in MarketWatch's Need to Know (http://www.marketwatch.com/story/how-the-rip-for-bitcoin-which-cracked7800-may-be-nearing-tulip-mania-levels-2017-11-09) column by Victor Reklaitis, some market participants believe that a downturn in junk bonds can presage a broader unraveling of equities.