Exactly 1 year ago (alright, in 3 days it will be), we posted a piece titled “High Yield Bonds: The Bear Battle Begins”. Following the post, high yield bonds began to sell off almost immediately. By December, the iShares High Yield ETF (ticker, HYG) was in a pretty steep descent. On an unadjusted basis, it reached a loss of near 10%. After staging essentially a mean-reversion bounce to a lower high, HYG commenced a slow leak towards that December low. Today, it undercut that low slightly, reaching its lowest level since 2011.
Although admittedly it is a tough space to make too much money on the short side, it has been a profitable battle thus far. The question is how much more downside is there? We don’t have the answer. It has every chance to form some sort of a double-bottom here, especially with energy being so washed out and such a high percentage of the high yield space. So one might be on watch for a larger undercut of the December low and subsequent reversal higher.
On the other hand, if the equity selloff is just beginning (on a cyclical basis), it may be that much more downside is possible for high yield bonds. In such case, the Armageddon high yield scenario that many are calling for may eventually materialize.
Again, we don’t know for sure. But if you have been in the bearish battle against high yield bonds over the past year like we have, it may be time to ring the register, at least on a portion of one’s position.
“Sub cash register” photo by Franck Blais.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.