Junk Funds Join the Great Bond Breakdown

While much attention is rightly focused on the falling prices of bonds and bond ETFs like the iShares Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) and the iShares Barclays Aggregate Bond Fund (NYSE: AGG) – both of which are now trading in bear market territory – much less has been talked about those high yield corporate bonds and bond funds that are becoming increasingly oversold in bull market territory.

Consider a high yield exchange-traded fund like the Barclays High Yield Bond SPDRS ETF (NYSE: JNK). Shares of JNK pulled back for four days in a row at the beginning of March, closing oversold for each of those sessions before reversing to the upside to finish higher for four out of the following five days. This is the rally that the fund is currently pulling back from, down three in a row heading into the weekend and slipping back to oversold levels.

Shares of JNK have a positive edge in the short-term of just over three quarters of a percent – significantly higher than its rival, high yield bond ETF, the iBoxx High Yield Corporate Bond Fund (NYSE: HYG). HYG closed just outside of technically oversold territory on Thursday, and follow-through selling on Friday has ensured that the stock will end the week at levels where traders have been more inclined to buy than sell.

Another option for traders is the PowerShares High Yield Corporate Bond Portfolio ETF (NYSE: PHB). Short-term oversold for three days in a row, PHB has a somewhat higher positive edge than HYG, but a lower edge compared to JNK.

Note that all three funds were trading at or near new, six-month highs as recently as the end of February.

For traders who cannot tear themselves away from the broader bond market, there may opportunities both on the short and long sides of many of these exchange-traded funds. While high yield bond ETFs and others like the iShares TIPS Bond Fund ETF (NYSE: TIP) are pulling back into oversold territory above the 200-day moving average, the fact that bond funds like AGG and the Vanguard Total Bond Market ETF (NYSE: BND) are trading below their 200-day moving averages means that high probability traders may soon have the opportunity to begin trading funds like AGG, BND and TLT from the short-side.

Here, traders will have to be patient for strength below the 200-day, similar to the short-term overbought conditions in bond ETFs from a year ago in 2011. Until then, avoiding these free-falling bond ETFs, may be the most prudent approach.

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David Penn is Editor in Chief of TradingMarkets.com