In short: RPK: "High yield is now bearish trend"; BB spreads ~273bp (+20bp in a month), CCC at 920bp — "a 14% cost to borrow on the crappiest companies, and those crappy companies are what your PE credit looks like." (HYG is the proxy.)
Junk bonds are loans to riskier companies. Hedgeye's trend signal on them has turned bearish, and the extra yield on the weakest (CCC-rated) borrowers is about 9.2 percentage points above Treasuries, which works out to roughly a 14% borrowing cost. RPK points out those are the kinds of companies private-equity firms own, so stress there is a warning for the wider credit market.
2:32Physical markets are closer to 120. Maybe we'll talk about that a little bit. That might be at least in part what is happening in credit. High yield is now bearish trend. And the double-B spread to Treasury is at like 273 basis points over, something like that. It's up about 20 basis points in the last month.
In short: The "one thorn": the high-yield bond A-D line has diverged bearishly from prices all 2026 — junk bonds are "horrible investments" that show liquidity pain first — but its McClellan Oscillator is "way the heck down there," wringing out the worst; he wants junk to start doing better in Oct/Nov as confirmation. (HYG is the proxy; he names no fund.)
Junk bonds are loans to weaker companies that pay a high interest rate because they are risky. McClellan calls them "horrible investments" that only do well when money is plentiful, which makes them an early warning of drying-up liquidity. All year, fewer junk bonds have been rising even as prices held up — a warning sign he calls the one thorn in his bullish case.
But his momentum gauge on that group is now extremely oversold, which usually happens just before the final low. If junk bonds start improving in October and November, he takes it as confirmation that there is plenty of money around and the stock rally is on.
15:37bond market. I keep a daily advance-decline line for those data as well and they are very useful because these corporate high-yield bonds trade much more like stocks than they do like T-bonds and they draw from the same liquidity pool as the stock market does. When you see a divergence between this advance-decline line and prices, it's a sign of trouble.
In short: A warning, not a short: junk-bond ETFs hold illiquid bonds but trade like cash; if "yield-pig" mom-and-pop holders redeem en masse, managers can't sell the bonds → "a run on the bank with no FDIC" (echoes pre-2008 CDOs).
HYG is an ETF that holds "junk bonds" — the IOUs of companies risky enough that they have to pay high interest to borrow. Rule's worry is a plumbing mismatch: the ETF itself trades instantly like cash, but the actual bonds inside it are very hard to sell (illiquid). He calls the buyers "yield pigs" — ordinary savers reaching for a bit of extra interest without understanding the credit risk underneath.
The danger: if a lot of those holders try to cash out at once, the fund managers can't sell the underlying bonds fast enough to pay them — "a run on the bank with no FDIC" (FDIC is the US deposit insurance that backstops normal bank accounts; here there is no such backstop). He stresses this is a warning, not a bet against HYG, and says it rhymes with the build-up before the 2008 crash.
16:46Uh and they're owned by people who I inelegantly term yield pigs — mom and pop investors who are chasing 150 or 200 extra basis points in yield with no knowledge of the credit risks that they're running. These ETFs are extremely liquid. There's trillions of dollars in AUM and they trade billions of dollars a day.
In short: The junk-bond index — stress is starting to spill from loans into high yield; contagion there would trip a higher "DEFCON."
HYG tracks "high yield" bonds — also called junk bonds — the debt of companies with weaker credit, which pay higher interest because they're riskier.
So far the stress has been concentrated in the loan market (see BKLN), not yet spilling into junk bonds. McDonald is watching HYG as the next domino: if the trouble jumps from loans into high-yield bonds, that's contagion spreading, and he'd treat it as a much more serious alarm — a higher "DEFCON" level.
14:33So there's a bifurcation going on whereas the high yield index the junk bond index uh the hygi exposed to software. Um whereas the loan market has a lot more software exposure. So, we're starting to see a a big credit u crisis that's in the loan market. It's starting to spill spill over to to um to to the high yield market, but it hasn't yet.
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