Bond investors face various types of risk including credit risk, which is risk of default, and interest rate risk, which is the adverse effect on bond prices when yields rise. PGHY takes credit risk but reasonably avoids interest rate risk. From the top down, an investor who believes there is still the threat of widespread defaults left over from the financial crisis would not want to invest in PGHY because the fund would indeed be hurt by such an outcome. The current events in the capital markets merit closer attention here for their potential to impact upon PGHY. In May many segments of the bond market declined as investors started to price in a "tapering" of Fed policy. Then, this week, Fed Chairman Ben Bernanke laid out a scenario where quantitative easing could slow down this year and end next year.
This has caused a panic in the bond market. The yield on the 10-year U.S. Treasury has increased by almost a full percentage point in just a few weeks, which is a very large move. Panics are difficult to see coming and difficult to analyze in terms of how long they might last. Panics can be recognized for what they are and so better managed emotionally. This is not the first time that there have been large declines in things like closed end funds, high-yield ETFs and other long dated bond funds and won't be the last time. Investors interested in buying PGHY would be better off waiting for the panic to subside before considering a position in this new fund. At the time of publication the author had no position in any of the stocks mentioned.Follow @randomrogerThis article was written by an independent contributor, separate from TheStreet's regular news coverage.
In trading on Friday, shares of the PowerShares Global Short Term High Yield Bond Portfolio ETF entered into oversold territory, changing hands as low as $23.4867 per share. We define oversold territory using the Relative Strength Index, or RSI, which is a technical analysis indicator used to measure momentum on a scale of zero to 100.