Breakdown in Junk Bonds A Red Flag for the Stock Market

High-yield, aka 'junk' bonds, which are highly correlated with the stock market & not with other bond classes, have made an impulsive breakdown below this large bearish rising wedge pattern in HYG (High Yield Corporate Bond ETF) which also makes the recent breakout a failed breakout, i.e.- bull trap. As the performance of junk bonds is much more dependent on the economy than interest rates, as with other bond classes, high-yield (junk) bonds have an extremely tight correlation to the stock market due to the fact that default rates rise when the economy weakens.

Jun 21, 2017 2:28pm|Categories: Equity Market Analysis, Fixed Income (Bonds)|Tags: , , , |2 Comments


  1. rsotc June 21, 2017 2:38 pm at 2:38 pm

    …and before anyone points out the fact that a good percentage of junk bonds are in the energy sector, hence the recent carnage in crude oil & the energy stocks unarguably has contributed to this breakdown, the technicals are what they are & this is a breakdown of a very clean, well-defined bearish rising wedge pattern. Although a false breakdown is always possible on any pattern at any time, today’s breakdown is clearly a bearish technical event which is likely to have longer-term bearish implications for junk bonds (and quite likely, the stock market as well).


    • Shambo June 21, 2017 2:42 pm at 2:42 pm

      I agree Randy, I think this is a significant technical event. Could reverse of course, but its a very valid caution flag for the market.


Leave A Comment