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Investors worried about the recent turmoil in the stock market may want to keep an eye on the high-yielding corporate bond market of about $ 1.5 trillion to help gauge when more significant sell-offs could begin on Wall Street.
Analysts are often seen as a canary in a coal mine in a low-yield or “junk-bond” market or an early warning when investors may start taking flight from risky assets.
The main drivers of recent jitters are becoming a fierce fight over the next Supreme Court judge, with prospects for a second fiscal year stimulus package slowing, Nov. 3. Then the possibility of contesting the presidential election and the Covid-19 epidemic – which threatens to crack. The foundation of recent market gains.
The rationale behind why investors should look for higher yields for signs of trouble is that junk bonds are sold exclusively by most U.S. companies, leaving debt holders at risk of shifting expectations around U.S. economic recovery.
That’s why during Monday’s sharp stock selloff, things could easily go awry in the coming months as an indication that market participants improved on sharp outflows in the high-yield sector.
In particular, the largest exchange-traded fund focused on sub-investment grade debt, Eyshers $ High Yield Corporate Bond Fund, HYG,
On Monday it was hit by about 6 1.06 billion outflows, the largest single-day outflow since the epidemic began.
“Our understanding is that further HYG weakness is a sign against the real risk,” said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group, in a note on Tuesday.
The ETF ended 1% lower on Wednesday at 1 83.04, down 1.4% so far this week, according to Factset data.
No wonder stocks also saw sharp declines this week. S&P 500 Index SPX,
Dow Jones Industrial Average DJIA, down 2.4% on Wednesday
Decreased 1.9%.
Among other high-yield indicators, Texas-based natural gas company Ethan United BR LP has postponed its planned 700 700 million high-yield bond sale, Bloomberg News reported Wednesday. Bond claimed to be financing. Yanded from July. Ethan’s call for comment was not immediately returned.
Still, some investors think the recent volatility and high yields may reflect prudent money managers who put cash aside to prepare for more lucrative opportunities around November, while volatility in risky assets could make bond prices cheaper.
In other words, a sudden tightening in the flow of credit and capital could be a sign of stagnant water, but a return to the massive massacre or temporary credit freeze seen in February as the epidemic initially swept through the U.S.
“I think that’s the right move,” said Rob Daly Lee, director of global fixed income at Glenmade Investment Management.
Daly pointed out that the U.S. High-yielding debt has cost a lot of epidemic stimulus, and members of Congress and the White House may be vulnerable to continued financial instability due to additional financial measures to offset the epidemic toll. Landscape
Nevertheless, the safety of the sector remains a net Federal Reserve, which for the first time in history began buying corporates during the Great Depression, including working as a creditor for the recent “fallen angels” or companies that have seen a reduction in their credit ratings. Happens. Famous investment-grade brackets for the junk bond sector.
Related: Fed buys $ 8.7 billion ETF Here are the details
The recent junk-bond weakness has followed a broad sense of boom in corporate debt over the past six months, which can now only hit the re-lattice.
U.S. The issuance of new junk bonds is breaking previous records this year, as yields in February have come closer to pre-epidemic levels and U.S. The burden of corporate corporate debt has touched a new record.
But even last week, investors were still hovering in the sector’s most bullish down segment, narrowing the spray between its highest and lowest rated bonds along the way.
For example, the yield gap between double-B and triple-C bonds was 11.69 percentage points on Monday, up from about 20 percentage points in March.
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