High Yield Trailing U.S. Stocks Brings Caution: Chart of the Day

Investors are failing to show the kind of demand for riskier U.S. bonds that they are exhibiting for stocks, according to J.C. Parets, founder and president of Eagle Bay Capital LLC.

The CHART OF THE DAY illustrates how he reached this conclusion in a blog posting yesterday: by tracking the share-price ratio between iShares exchange-traded funds of high-yield debt and Treasuries. The latter ETF is linked to bonds maturing in more than 20 years.

This year, the ratio dropped about 10 percent through yesterday as the Standard & Poor’s 500 Index and the Dow Jones Industrial Average rose to records. The chart shows the SPDR S&P 500 ETF. Parets used the Dow in a version on his All Star Charts blog.

“One is not confirming the other,” Parets wrote. “That’s not a good sign.” This gap is more likely to be resolved by stocks falling than by lower-rated debt rising, the New York-based investor wrote in a follow-up e-mail.

A similar disparity may affect financial stocks worldwide, according to Michael Hartnett, Bank of America Corp.’s chief investment strategist. In a July 16 report, he included a chart showing the shares are climbing this year even as U.S. high-yield bonds trail their investment-grade peers.

“This divergence won’t last,” wrote Hartnett, who is also based in New York. “Either high yield rallies again, or the bank stocks decline.”

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