Who’s Afraid Of The Big Bad Fed ?

Only the little folks it seems.

I got an interesting chart from a friend this morning that suggests that the high yield bond ETF, HYG US, is leading the way for a lower S&P 500.

HYG SPX 10Y USTGraph : 10Y UST Yield (in yellow), S&P Index (Orange), HYG ETF (White), Bloomberg High Yield USD Bond Index (Red) and Morningstar EM Bond Total Return Index (Green)

We note that the 10Y US treasury yield chart is turning higher even as S&P holds its lofty highs along with the HY bond index and the EM bond index.

It is the ETF players who are freaking out losing about 1.8% from its last high versus almost nothing on the S&P.

Rightly so, I think.

The inevitability of an eventual rate hike is dampened with the possibility of European QE  but there are just too many loose ends for the small investor who has few avenues to hedge. Negative rates in Europe does not mean that US rates cannot go higher.

Credit remains stable at the moment for the institutional investors as evidenced in the bond indices. Meanwhile the push for private clients to take up the high yield bonds in their inventory as reported yesterday that Citi says “Just Use Leverage for 10% Returns”.

“Sept. 9 (Bloomberg) — Stop complaining junk-bond yields are too low. Instead, just use borrowed money to juice returns.
That’s the message from Citigroup Inc. analysts, anyway.
Investors are better off leveraging speculative-grade bonds than U.S. Treasuries, stocks, emerging-market or investment- grade debt to reach a 10 percent return goal because they don’t need to borrow as much to get there, according to strategists led by Stephen Antczak. This means lower potential losses in a selloff.” http://www.bloomberg.com/news/2014-09-09/don-t-hate-credit-just-use-leverage-for-10-returns-says-citi.html

For high yield papers do not sit well in banking books with the new Basel 3 rules giving rise to larger balance sheet constraints for risky debt.

The papers are best off in an unregulated pocket which is the retail investor or privately held funds that are not subjected to regulatory supervision.

If the HYG ETF continues in its sell down at current index prices, the probability is that we will have some cheap bonds on offer for private bank clients who are hopefully not too overloaded with bonds already.

Now, if you were a retail investor, would you be buying any HYG now ?

Or would the eventually of higher rates drag the S&P down along with it ?