New Quarter, New Selling of Junk. Call it ‘Spring Cleaning’
Just as it seemed corporate bonds were starting to get their footing, they slipped again. In this case, high yield (junk bonds) and investment grade credit had a bad start to the quarter with 2.74% and 1.45% decline respectively. Two ETFs that track these markets are the iShares iBoxx High Yield Corporate ETF (HYG) and the iShares iBoxx Investment Grade ETF (LQD).
The weakness comes on the heels of the announcement by the Federal Reserve that they were set to buy about $100 billion in corporate debt for the first time in its history. As money is becoming available, the scramble to get cash while you can has led to increased issuance. Also, as companies get downgraded, this looks to put more stress on the high yield market as the number of companies that are rated as junk and the need for capital outweighs the immediate supply of money.
HYG sold off from multi-year highs around $88.50 to $68 in March. It was the worst month for HYG since the financial crisis in 2008. Predictably, HYG rallied with the announcement and easing of tensions to reach the 50% Fibonacci retracement of the sell-off near $78. This is a typical retracement point for price before the previous trend resumes. While the trend may decide to consolidate its losses as it retests $68, there is a chance that it doesn’t extend below that point unless the panic escalates.
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Option traders can consider a 15 MAY 20 75/74 long put vertical for around $0.50 or less. The max gain of $50 per contract or 100% ROR is achieved if the stock closes below $74 at expiration. Consider closing early if the vertical can be sold for $0.80 or more.