Chart Of The Week: Corporate Bonds Go Vertical

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Includes: LQD, LWC
by: Joseph Calhoun

By Joseph Y. Calhoun

You don't often see a move like this in a bond market. This is a chart of the long-term, high-grade corporate bond ETF from SPDR, up 6.6% in the last month.

Click to enlarge

I chose this chart because of what it shows about modern markets, which don't allow for much introspection on the part of investors. We're all traders now, and when the momentum hits an asset, you better get on or you'll miss the ride entirely. I don't know of any massive change in fundamentals for long-term (13-year duration), investment grade (90% A and BBB) bonds over the last month that would account for a 6.5% move.

So, what makes something normally sedate like this move that much? There doesn't appear to be any significant short interest in LWC itself, but maybe there were shorts in the underlying bonds that needed covering. Or maybe it is a function of bond market liquidity, which is a problem for buyers and sellers. This was across the board in investment grade corporate bond ETFs, so it isn't anything specific to LWC.

Whatever the cause, I think one ought to tread carefully here. Vertical moves like this is are generally unstable and subject to quick reversals.

Disclosure: We are long LWC and LQD in our portfolios.