Are Corporate Bond ETFs Rolling Over?

Hey There Income Traders,


With the market deeply entrenched in stagflation — that’s slowing growth and rising inflation — #IncomeHunters must keep an eye on corporate bond ETFs for signs of trouble in corporate America.


Why?


Because these bonds have historically deteriorated in value well before the stock market plunges.


Check the iShares Investment grade Corporate Bond ETF (Ticker: LQD) performance heading into the Leman failure (graph below) …


I overlayed LQD with the S&P 500 ETF Trust (Ticker: SPY) to give you an idea on the warning signs LQD was giving off prior to the collapse …



Lehman filed for bankruptcy Sep 15, 2008, meanwhile LQD had diverged from SPY in early 2007 providing a signpost for things to come …

Double Barrel Debt Burden

The difference between the 2000s and 2020s is corporations are buried in debt and the Government will not be able to bail them out …


The 2020s will be dramatically different from the 2000s for three reasons …

1.    The debt burden is much greater

2.    Inflation will be elevated for a prolonged period

3.    Slower growth will not enable the Fed to fight inflation

What makes the markets soo interesting is that not many investors understand what stagflation is …

Nor do they understand how impossible the Fed’s job of create growth while controlling inflation is … 

J-Pow has done a miraculous job brainwashing investors into thinking the Fed has a magic toolbox with all the tools necessary to reduce Government debt, create economic growth and fight price inflation …

However, at some point higher prices without trending growth will squeeze corporate profits and the overwhelming debt burden will lead to a credit crisis …

That is why closely watching corporate bond ETFs is so critical …

Corporate Bond ETFs to Watch

The LQD ETF is a very liquid corporate bond ETF …. The ETF holds AAA credit down to BBB credit however, in such a low interest rate environment the managers overload the ETF with BBB rated bonds to boost returns …

When the market approaches similar conditions to 2008 it will be difficult for managers to liquidate the holdings of BBB rated bonds into the secondary market …

The reason for this is, in a weak economy, as BBB rated bonds are downgraded to BB they fall into the high yield category forcing investment grade portfolio managers to sell them …

This will accentuate the price drop, which makes LQD a must watch for signs of capitulation … You can make quick easy profits by getting ahead of the market …

 

iShares High Yield Corporate Bond ETF (Ticker: HYG)

HYG has been a popular high yield play especially because the Fed via BlackRock had been buying HYG as a strategy to support the corporate bond market …

HYG will be the first bond ETF to fall if corporations begin  experience counterparty credit problems …

The signpost to warn of a crack in the credit foundation is the Spread between US Treasury rates and high yield credit … Check it out …



Notice the low in the high yield credit spread prior to the great recession in 2008 … Once the spread broke out it fueled a big move out of high yield into the safe haven of US Treasury bonds …

Recently the spread widened and is now holding in at current levels … I will keep an eye on this as a trigger for a bearish option strategy on the ETF … Here is the current technical setup for HYG …


I do not  think HYG can trade much higher from here …

My timing for a steeper fall in economic activity is Q2 2022 so there is time …

You just never know what external event could trigger credit problems …

If you agree with the trade and feel the economy could suffer more immediate issues you could consider an 87/85, put spread to Jan’22 for $.88 …

 

Bring It Home

I wanted to introduce additional bond ETFs to follow … This week presented another good opportunity to jump on the TLT bear strategy to capitalize on heavy Bond supply …

I made 70% on half my 149/147 put spread to 9/10 expiry and am carrying half into expiry …

There are many good strategies and bond ETF pairs to trade …

Please join me tomorrow for the 1pm Griff’s picks live event that is included in the Vix Edge subscription … If interested in Vix Edge please call Ted at (888) 872 3301 … Hope to see you tomorrow and as always …

Live and Trade With passion My Friends,

Griff


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