Where to go: Treasuries or Junk?

This is the question that we like to ask ourselves when we look at the US Bond market. Would we prefer to be heavier on the government debt side or higher yielding corporate bonds (“Junk”)? Logic would probably tell us to be in the junk while rates keep heading higher. And that strategy has actually been working nicely for some time now.

But what do we do from here?  – that’s the question. This is a chart of the iShares High Yield Corporate Bond ETF relative to the iShares 20+ Year Treasury ETF. As we can see, the 50% retracement from the 2011 decline has been trouble for over a year.

1-16-13 hyg vs tlt

So I would be watching this 80 area closely on the spread as Treasury Bond prices continue to come off. I think it would be healthy to see a little bit more consolidation before breaking out, but as always, the more times a level is tested, the higher the likelihood that it breaks. And this looks like test #4 on my count.

Stay tuned…