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The Biggest Mistake Bond Investors are Making Right Now

By Jeff Clark
Tuesday, December 31, 2013

Bond investors are buying risk.
 
Treasury-bond prices are closing out 2013 near their low of the year. But the junk-bond market is going in the opposite direction.
 
The iShares iBoxx High Yield Corporate Bond Fund (HYG) closed last Friday near its highest price of the year.
 
Take a look...
 
2013 HYG fund chart
 
HYG invests mostly in corporate bonds rated BB and lower. That's the so-called "junk" bond category. These bonds carry a higher risk of default. So they tend to pay a higher interest rate to compensate investors for that risk.
 
Since June, while longer-term Treasury bonds have lost about 10% of their value, junk bonds have gained about 5%. In other words, investors are selling the safe stuff, and they're taking on risk.
 
We're at the point now where the premium of long-term Treasury bonds over junk bonds is as low as it was back when the stock market peaked in 2007, and just before a major correction in 2011.
 
Here's a chart showing the price relationship between the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and HYG...
 
TLT over HYG bond chart
 
On average, TLT trades at about a 40% premium to HYG. In times of excessive risk aversion – when investors are looking for the safest investments possible, like during the financial panic of late 2008, TLT will trade at a much higher premium.
 
When investors are comfortable, though, it's a different story. The Treasury-bond premium to HYG nearly evaporates.
 
Right now, TLT trades at a mere 10% premium to its junk bond counterpart. When you combine that with the historically low level of the Volatility Index and the record-breaking level of margin debt, it's clear investors have developed a renewed appetite for risk.
 
But as we saw in 2007 and in 2011, that's not a good thing.
 
Best regards and good trading,
 
Jeff Clark




Further Reading:

Find more reasons Jeff is bearish here:
 
Show This Chart to Your Bullish Friends
"Given the look of this chart, stocks have more downside."
 
Reversal
"The stock market tends to form important tops right about the same time margin debt peaks..." And in October, total margin debt climbed to a new all-time record.

In The Daily Crux
Market Notes
American consumers are spending money... credit-card companies American Express, Capital One, Discover, MasterCard, and Visa hit new 52-week highs.
 
European stocks are in an uptrend... Germany (EWG), Italy (EWI), and France (EWQ) stock funds are up 20%-plus over the last six months.
 
Gold's "win streak" is over... the metal finishes the year down more than 25% after registering 12 straight years of gains.
 
Transportation giants FedEx and UPS finish the year up 45%.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1841.07 +0.0% +31.3%
Oil (USO) 35.53 -0.9% +7.5%
Gold (GLD) 115.39 -1.5% -28.1%
Silver (SLV) 18.85 -2.2% -35.2%
U.S. Dollar 80.02 -0.4% +0.5%
Euro 1.38 +0.4% +4.4%
Volatility (^VIX) 13.56 +8.8% -37.8%
Gold Stocks (^HUI) 193.03 -2.6% -55.2%
10-Year Yield 2.98 -1.0% +74.3%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 183.82 +0.0% +33.9%
Israel (ISL) 16.74 +0.8% +29.2%
Japan (EWJ) 12.12 +0.9% +26.8%
Taiwan (EWT) 14.36 +1.4% +9.0%
Russia (TRF) 15.05 -0.8% +6.4%
Canada (EWC) 29.02 +0.6% +5.1%
S. Korea (EWY) 63.89 +0.2% +4.1%
India (IFN) 20.02 +0.8% +1.6%
China (FXI) 37.97 -0.6% -1.0%
Singapore (EWS) 13.06 +0.2% -1.9%
S. Africa (EZA) 64.20 +2.0% -6.3%
Lat.America (ILF) 36.75 -0.3% -12.2%

Sector ETFs
Symbol Price
Change
52-Wk
Biotech (PBE) 37.16 -0.1% +65.2%
Alt. Energy (PBW) 6.40 +1.6% +62.7%
Media (PBS) 26.47 +0.5% +62.3%
Defense (PPA) 30.87 -0.2% +52.0%
Consumer Svcs (IYC) 121.22 +0.4% +43.5%
Health Care (IYH) 116.54 +0.3% +43.1%
Transportation (IYT) 131.10 +0.0% +42.6%
Industrials (IYJ) 100.94 +0.1% +42.2%
Retail (PMR) 34.77 +0.4% +41.5%
Big Tech (QQQQ) 87.39 -0.2% +38.6%
Software (PSJ) 36.16 +0.0% +34.9%
Financials (IYF) 79.86 -0.1% +34.6%
Semis (PSI) 18.73 +0.2% +33.9%
Construction (PKB) 22.31 +0.1% +31.4%
Water (PHO) 26.16 +0.1% +29.3%
Telecom (IYZ) 29.70 -0.2% +28.2%
Nanotech (PXN) 7.42 +0.5% +26.8%
Basic Mat (IYM) 81.17 -0.1% +22.1%
Insurance (PIC) 19.01 +0.1% +18.3%
Utilities (XLU) 37.90 +0.2% +14.4%
Real Estate (IYR) 63.28 +0.1% +2.4%

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