Since mid-November, bonds have been selling off. The sell-off is widespread, affecting everything from Treasuries and high-grade corporate bonds down to high-yield (“junk”) bonds. While uptrends remain intact in a few segments of the bond market, other segments have been in downtrends for some time, and a large group of bonds is on the cusp of entering a downtrend.
The iShares Core U.S. Aggregate Bond ETF (AGG) invests in various investment quality bonds, including U.S. Treasuries, mortgage-backed securities, and corporate bonds. The ETF, therefore, provides an outlook on high-quality bonds as a whole. The ETF hit a high of $113.27 in July, and since has fallen as low as $108.64 in November. The $108.75 region aligns with a long-term rising trendline extending back to 2013. A decline below $108.75, and especially below $108, signals most investment quality bonds have entered a long-term downtrend.
Since 2012 the ETF has moved in a triangle pattern. A drop below the multi-year rising trendline breaks the triangle and signals lower prices to come. The triangle breakout, if it occurs, gives a target of $101 to $100 based on the size of the triangle subtracted from the breakout price. While the price could rally back to $113 or above, that is a less likely scenario. The rise to $113.27 was a false breakout above 2012 and 2015 highs. Since the price already tried to go higher and couldn’t, the path of least resistance is currently down. While a triangle is in place, many traders will also be viewing it as a triple top.
iShares iBoxx Investment Grade Corporate Bond ETF (LQD) has a similar pattern as AGG but is still above trendline support. This ETF invests in investment grade corporate bonds. It is moving in a triangle pattern since 2012, with rising trendline support intersecting at $113.30. The ETF peaked three times between $123.20 and $124.48 over the last five years. The November high of $124.48 could be considered a false upside breakout, which indicates the price is likely to keep heading lower toward trendline support. A breach of the multi-year rising trendline, and especially above a drop below $112.60, indicates a long-term downtrend in high-grade corporate bonds is underway.
If the price breaks below trendline support at $113.30, the long-term target is $100, based on the size of the triangle subtracted from the breakout price.
iShares iBoxx High Yield Corporate Bond ETF (HYG) is a downtrend since 2013 when it peaked at $96.30. It has made lower lows and lower highs every year since. The ETF, which invests in lower-quality bonds that typically pay higher yields, had a strong rally to start 2016. Despite the rally, the overall trend remains down with the price well below the 2015 peak. The next wave in the downtrend is likely starting, as a sharp drop off the $87.56 October high has broken the rising trendline for 2016 and taken out all major swing lows since August. This indicates a downtrend has begun in the short-term, which aligns with the long-term downtrend. If the long-term downtrend continues, and it is expected to, the price will drop below the 2016 low of $75.09, targeting $73 or lower.
The Bottom Line
High yield bonds have been in a downtrend for some time, and that is expected to continue, especially if the higher-grade bonds also enter a downtrend. The Core US Aggregate Bond ETF provides a cross section of investment-grade corporate bonds, and it is sitting right on its long-term trendline. Any further weakness and most segments of the bond market can be considered in a downtrend. If that occurs, investors are facing the likelihood of much lower prices over the next several years.
Disclosure: The author doesn’t own any of the ETFs or bonds mentioned.
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