There's More Pain In Store for Junk Bonds

It's been a rough ride for junk bonds since the European Central Bank (ECB) announced in late October its intent to taper bond purchases. That pain is evident in a daily chart of the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG), which sliced cleanly through formerly solid support at its 200-day moving average in November.

We see a potentially significant bearish tell from the action around HYG's 200-day trendline. Namely, after numerous "holds" at 200-day support since mid-2016, the aforementioned breach of this trendline has been followed by multiple failed retake attempts.

Further, the 200-day moving average is trading just south of $88, which has been significant in and of itself, halting HYG rally efforts in both November and January. This level also corresponds to significant call open interest at the newly front-month February 88 strike, with an ample 60,664 contracts outstanding. It should also be noted that former peak put open interest of nearly 140,000 contracts at the January 86 strike just expired, as did a healthy 80,000 January 87-strike puts, removing a potential layer of options-related support in the short term.

Meanwhile, HYG has bled $2.75 billion in assets over the past several weeks, due to investor outflows (source: etf.com). With negative outflows overlaid against a weak technical set-up, we expect technical failures at the 200-day and round-number $88 level to continue for the junk-bond ETF.