As stocks continue to build forward momentum after a tumultuous December, it’s been high-yield bonds going the opposite direction with the ICE BofAML US High Yield Master II Total Return Index resuming its downward trajectory. Investors looking to capitalize on the weakness in high yield can look to the ProShares Short High Yield (SJB) .
It’s a clear sign that the risk-off sentiment that started in October is affecting the high-yield sector that was flying high during the midst of the extended bull run in the capital markets–a time when investors were willing to forego the extra risk in order to achieve the higher yields.
With respect to their 200-day moving averages, SJB is tracking above this level while high-yield bond ETFs like the SPDR Bloomberg Barclays High Yield Bond ETF (JNK), iShares iBoxx $ High Yield Corp Bd ETF (HYG) and the Invesco Senior Loan ETF (BKLN) are languishing in the current risk-off environment.
The tide could turn for high-yield bond ETFs, especially now that the Federal Reserve is sounding more accommodative with respect to interest rate policy. Following the fourth and final rate hike of 2018, the central bank mentioned paring down its rate hikes to two rather its original forecast of three.
The central bank didn’t show much dynamism in 2018 with respect to monetary policy, obstinately sticking with a rate-hiking measure with four increases in the federal funds rate. That appears to have changed given the current economic landscape, and especially in the capital markets as Fed Chair Jerome Powell is now preaching patience and adaptability.
“As always, there is no preset path for policy,” Powell said. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
Powell’s latest comments come as U.S. equities finished their worst year in over a decade. The Dow fell 5.6 percent, while the S&P 500 lost 6.2 percent and the Nasdaq Composite fell 4 percent.
The ProShares Short High Yield (SJB) was trading at $22.82 per share on Tuesday afternoon, down $0.13 (-0.57%). Year-to-date, SJB has declined -1.28%, versus a -3.53% rise in the benchmark S&P 500 index during the same period.
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