Jeffrey Gundlach called it on risky link between stocks and junk bonds

DoubleLine Capital co-founder takes to Twitter to express his validation as FAANGs fall

Nov 10, 2017 @ 11:00 am

By Bloomberg News

Jeffrey Gundlach has been warning something's got to give. Based on the past two days, looks like we have our answer.

Stocks fell around the world a second day and high-yield bonds headed for a fourth straight loss, resuming a historic correlation that the hedge fund manager on Wednesday had warned was alarmingly out of whack.

"JNK ETF down six days in a row, closing near its seven month low," the DoubleLine Capital co-founder wrote on Twitter Wednesday. "SPX up five of last six days, closing at an all time high. Which is right?"

With high-yield bonds and the tech-heavy index of Nasdaq 100 stocks moving in tandem for most of their history, a recent breakdown in correlation suggests the selloff gripping junk is set to spread further. True to Gundlach's warning, Facebook, Amazon, Apple, Netflix and Google owner Alphabet – collectively known as the FAANGs – are tumbling too.

As prospects for meaningful U.S. fiscal reform faded Thursday, the Nasdaq 100 fell 0.5% while the Bloomberg Barclays US Corporate High Yield Bond Index fell 0.4% to its lowest point in nearly two months. Previously, the mega-cap index had gained 1.5% since the start of the month while the high yield index fell 0.4?%.

"A material pullback would be something we need to watch for, as a deteriorating credit market has led each of the largest equity pullbacks since 2014," said Frank Cappelleri, a senior equity trader and market technician at Instinet. "With divergences once again apparent now, the bulls face their latest test."

Though one day of trading doesn't make for a trend, that they both declined was an ominous sign that junk bonds may pull down equities further. Leading up to Thursday, one-month correlations between the Nasdaq 100 and SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, had reached its lowest level since 2014.

In the past decade, there were only three other instances where the relationship between JNK and mega-cap tech broke down to this degree. Each time, the two assets began to resume their positive correlation within four to 12 days, data compiled by Bloomberg show.

As for Gundlach, he took to Twitter Thursday to express his validation.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

How to explain risk to a client

Most investors know investing involves risks as well as rewards and that the higher the risk, the greater the potential reward. But there are different types of risk and some are easier to understand than others, says Kendrick Wakeman of FinMason.

Latest news & opinion

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print