HYG just tested $80, a resistance level not seen since July, 2008. You can see from the chart that HYG traded between 80 and 90 before the financial crisis but during the recession. Are high yield investors ready to be compensated for pre-crisis level risk priced in yield? You can always argue about the "priced in" threshold though. This is an interesting article I found at Bloomberg.com.
Downgrades Point to Wider High-Yield Bond Spreads, Moody’s Says
"June 22 (Bloomberg) -- Downgrades in the U.S. high-yield credit market to Caa3 or lower are occurring at a record pace this quarter and suggest bond spreads may be too narrow, Moody’s Investors Service said.
Rating cuts to Caa3, the ninth level below investment grade, or lower are on track to reach 97 in the April through June period and 182 for the first six months of the year, the most for any two-quarter period, Moody’s said in a June 19 report. The downgrades indicate that the U.S. high-yield default rate will exceed May’s 10.2 percent by a “substantial margin,” Moody’s Chief Economist John Lonski wrote in the report.
(read full article)
Looking at the chart HYG is up 33.3% from the March low (around 60). A 50% retracement from 80 would reach the 200 day moving average at 70, but the 50 day moving average at 75.90 is a fight along the way. For the intermediate term (if the $MOVE index via inflationary pressures doesn't force yields to the ionosphere) it appears that HYM formed a double bottom at the November and March lows. We'll see.
Disclosure: No Position
