A continuing low interest rate environment has been the catalyst for the rally in high-yield corporate bond prices over the last two years. The iShares iBoxx $ High Yield Corporate Bond ETF is up over 28% from its 2016 low to its October 2017 high. This is the result of investors who are seeking yield being forced to expand their risk tolerance, and buy high yield corporate and junk bonds. But that strategy will shift when the spread between risk and yield narrows and they move back into US treasuries.
It is expected the Federal Reserve will raise interest rates by 0.25% this week, and many Fed watchers believe there will be further rate increases in 2018. What is less certain is the timing and magnitude of any future rate increases. The best gauge on trajectory and magnitude of short-term US interest rates may be the contrarian indication of high-yield corporate bond prices.
The daily chart of the HYG shows what looked like a small head and shoulders top forming last October. Pattern neckline support in the $87.50 area was broken in November, along with the 50 day moving average. The fund price dropped quickly back down to its 200 day moving average but bounced just as quickly back up to the 50 day average.
For the last several weeks it has been moving in a narrow sideways channel below the same level of former neckline resistance and above $82.20 support. The integrity of these channel boundaries will likely determine the intermediate term direction the HYG fund, and inversely the direction of short-term interest rates.
It is one chart to watch after the Federal Reserve news.