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Junk Bonds Get Nailed

By Chris Lowe, Editor-at-Large on August 4, 2014

How bad was last week for investors?

It’s hard to pinpoint the worst of the selling. The Dow, the S&P 500, the Nasdaq and the Russell 2000 small-cap index all broke below their 50-day moving averages.


Source: Stockcharts.com

For many investors, this signals a breakdown in a bull market trend.

And if you look at the Russell 3,000 – which makes up 99% of stock market capitalization in the US and is a good barometer for US stock market performance – the average stock in the index is down 7.7% over the last month. And one-third of the stocks that make up the index are down 10%.

But the real pain is being felt by investors who’ve been betting on further gains in junk bonds.


Source: Stockcharts.com

As you can see from the chart above, the iShares iBoxx $ High-Yield Corp Bond ETF (NYSE:HYG) – which tracks an index of US junk bonds – has also knifed below its 50-day moving average. And as of Friday’s close it’s down 3% from its recent peak.

That’s equivalent to more than two-thirds of the ETF’s annualized yield of 4.5%.

And investors are hitting the panic button. HYG saw $361 million (or 3% of assets) in net outflows as investors yanked their money out of this ETF. And investors pulled another $122 million from the other big US junk bond ETF, the SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK).

As we’ve warned, by evaporating yields from less risky Treasury bonds, the Fed has forced investors to seek yields in risker junk bonds. (Junk bonds are corporate bonds that carry a high risk of default.)

This crowded trade now seems to be reversing. And yet another Fed-induced asset bubble looks set to go pop.

P.S. Don’t forget to pick up your copy of Bill’s new book, Hormegeddon. It’s a hugely valuable insight into why central planning, done on a large enough scale, inevitably leads to disaster. Read a full review by Stansberry & Associates founder Porter Stansberry… and claim your copy… here.

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