Chart Of The Week: Buy High Yield Bonds!

JC Parets
February 29, 2016

With all of the bad news and negative sentiment surrounding the high yield bond market, I think this is a place where we want to be buyers, and no longer sellers. High yield bonds are just a fancy way to refer to "Junk bonds". At the end of the day, high yield is just that: high yield, because you're getting paid a higher return for the risk you're taking by owning junk. Both on their own and relative to the safe-haven U.S. Treasury Bonds, these things have been destroyed over the last few years.

Moving forward

, we want to be aggressively buying Junk Bonds.

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The first chart is a ratio of the High Yield Corporate Bond Fund vs the U.S. Treasury Bond Fund. In order to visualize the changes supply and demand, we are looking at a ratio chart of the price of $HYG vs $TLT.

hyg tlt div

This particular ratio has now fallen all the way down to the late 2008 lows. Notice how this ratio bottomed out several months before the U.S. Stock Market bottomed in March 2009, acting as a great leading indicator at the time. On February 11th last month, this ratio bottomed out and turned around on a dime. This occurred on the same day that both the S&P500 and Nasdaq Composite put in new 52-week lows a quickly reversed higher.

I think we can own High Yield Bonds, particularly against a Short U.S. Treasury Bond position. In other words, for every 1 dollar long $HYG we are short one dollar worth of $TLT.

If you want to take this one step further, there is another interesting chart that may or may not mean anything to you. Since we're discussing yields here, I adjusted this ratio for dividend payments, which I rarely do. I am a firm believer that only price pays. Supply and demand has memory of price paid, not total return. But either way, I thought I'd bring up the adjusted chart just for the purposes of this conversation:

hyg tlt d

This is the exact same chart, except adjusted for dividends. Notice how last month prices briefly fell below the 2011-2012 lows and quickly reversed. This came with a simultaneous bullish momentum divergence at the new lows, which we also saw in the unadjusted chart above. Last month's failed breakdown and reversal higher came right near the 61.8% Fibonacci retracement of the 2008-2011 rally.

I think based on the weight-of-the-evidence, not only do we not want to be short high yield anymore, but we want to be aggressive buyers as long as we're above the February lows.

I like it!

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Tags: $HYG $TLT $ZB_F $JNK $ZN_F $TNX $TYX

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