High Yield Mayhem

An interesting divergence today, as when the market was jammed into the close  by someone who definitely wanted stocks higher, the high-yield bond ETF, HYG, went hard in the opposite direction. Which is unusual because high-yield credit generally is highly correlated with the S&P 500. The divergence will be closed, but by falling stocks or improving credit? We’ll see.

While the furious tape painting attempt into quad witching continues courtesy of a surging EURUSD, which we anticipate will sell off shortly once again, as tomorrow brings absolutely nothing actionable out of Greece, a better indication of what is happening in the market are the High Yield ETF JNK/HYG which both were just been punched out. It is unclear if this ETF was the plaything of some HFT algo (we will follow up with Nanex shortly), but it appears that these ETFs would have been a direct casualty had the sell off continued after 3pm, at which point the bidside of the Level 2 order book essentially disappeared, and the only thing that prevented an epic collapse was central bank purchasing of the EURUSD which lifted the entire market. Yet what is nonetheless quite bad for holders is that the JNK/HYG has now taking out not only 2011 lows, but lows unseen since September 2010. The ETFs tend to be a good proxy of the actual cash HY market as can be seen in the second chart below. Which is why we send our condolences to all HY fixed income hedge funds which are about to be dealing with some very substantial margin calls. The crash may have been delayed but has not been prevented.

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