Why the junk bond selloff is getting very scary

The junk bond market is looking more and more like the boogeyman for stock market investors.

The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund HYG, -2.00% dropped 2% on Friday to close at the lowest price since July 17, 2009. Volume 54.1 million shares, or nearly six times the 30-day average of 9.5 million shares, according to FactSet.

See also: 5 things that show the junk bond market is in big trouble

While weakness in the junk bonds -- bonds with credit ratings below investment grade -- is nothing new, fears of meltdown have increased after high-yield mutual fund Third Avenue Focused Credit Fund TFCIX, -2.86% TFCVX, -2.70% on Thursday blocked investors from withdrawing their money amid a flood of redemption requests and reduced liquidity.

This chart shows why stock market investors should care:

FactSet When junk bonds and stocks disagree, junk bonds tend to be right. The MainStay High Yield Corporate Bond Fund MHCAX, -0.74% was used in the chart instead of the iShares iBoxx ETF (HYG), because HYG started trading in April 2007.

When investors start scaling back, and market liquidity starts to dry up, the riskiest investments tend to get hurt first. And when money starts flowing again, and investors start feeling safe, bottom-pickers tend to look at the hardest hit sectors first.

So it’s no coincidence that when the junk bond market and the stock market diverged, it was the junk bond market that proved prescient. Read more about the junk bond market’s message for stocks.

There’s still no reason to believe the run on the junk bond market is nearing an end.

Don’t miss: Junk bond yields are soaring--and the Fed hasn’t raised rates yet and Moody’s sound alarming bells over junk bonds issued by commodities companies.

As Jason Goepfert, president of Sundial Capital Research, points out, he hasn’t seen any sign of panic selling in the HYG, which has been associated with previous short-term bottoms. “Looking at one-month and three-month lows [in the HYG] over the past six years, almost all of them saw more extreme sentiment than we’re seeing now,” Goepfert wrote in a note to clients.

Full story here: http://www.marketwatch.com/story/why-the-junk-bond-selloff-is-getting-very-scary-2015-12-11

Featured Posts
Recent Posts
Search By Tags
Follow Us
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square