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Global Macro: Junk Bonds Move Lower

NEW YORK ( TheStreet) -- Declining junk bond prices indicate that investor sentiment may be rolling over to the downside.

The chart below of iShares iBoxx $ High Yield Corporate Bond (HYG) shows that junk bonds reached yearly highs in late October and have since begun to fall lower, which is significant because equities and high yielding credit tend to be correlated.
[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/12106914/1/everyone-declares-victory-after-us-airwaysamr-merger-approval.html"><em>Everyone Declares Victory After US Airways/AMR Merger Approval</em></a>]

Similar to emerging markets, analyzed in yesterday's article, assets hurt by rising interest rates have started to move lower, while equity U.S. equity markets have remained resilient.

The movement lower by junk bonds indicates the Federal Reserve may reduce its bond purchases sooner than expected. Fed members have been on both sides of the fence when discussing their December policy meeting publicly. Some officials see more aggressive stimulus as a must, while others are reminding markets that stimulus is not infinite.
[Read: <a target="blank" data-add-tracking="true" href="http://www.thestreet.com/story/12106703/1/junked-out-how-the-big-three-rating-agencies-lost-their-mojo.html"><em>Junked Out: How the Big Three Rating Agencies Lost Their Mojo</em></a>]

With uncertainty over future policy and assets trading at relatively overbought levels, the safe trade has been to sell. Equities were volatile on Tuesday, and continued pressure in correlated markets could be the catalyst for equity indices turning lower by year's end.
[Read: <a target="blank" data-add-tracking="true" href="http://www.mainstreet.com/article/lifestyle/7-worst-ways-end-office-romance"><em>7 Worst Ways to End an Office Romance</em></a>]

At the time of publication, the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a graduate of Georgetown University, where he earned a degree in Economics.

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