High Yield Bonds Flash Warning

The daily Advance-Decline (A-D) Line for high yield corporate bonds is making a bearish divergence versus the SP500.  This is a concern because it conveys a message saying that there are liquidity problems.

Every day, thousands of corporate bonds are traded much like stocks, and FINRA publishes the data on advances and declines at https://www.finra.org/finra-data/fixed-income/market-activity.  High yield bonds are of special interest to me, because they tend to trade more like the stock market than like Treasury bonds.  That means they draw from the same sources of liquidity that stocks do, and so when their A-D data start doing poorly, it is a sign of liquidity troubles. The daily A-D Line changes every day by the difference between Advances and Declines.

High yield bonds are sometimes called "junk" bonds, and they are among the least deserving investment vehicles because of their higher default risk.  So if the HY Bond A-D Line is rising, that means liquidity is so plentiful that even the least deserving issues can get access to that liquidity.  When it starts to suffer, and especially in a way not reflected by what the more deserving SP500 is doing, that conveys a big warning that liquidity may be drying up.

The problem with any divergence like this is that it is not a "signal", it is just a "condition".  Nothing will tell us when that condition will decide to matter.  And sometimes a divergence can get "rehabilitated".  So the observation of a bearish divergence now between the HY Bond A-D Line and the SP500 is no guarantee of problems.  But it is a big warning that something is wrong.

Divergences can also be hard to read and interpret sometimes.  Some might notice that the all-time high for this HY Bond A-D Line was back on Feb. 20, 2026, and it is well below that level now.  But this is not a divergence I find very important.  The price decline in March 2026 took the SP500 down, and this HY Bond A-D Line went down with it.  That is very normal.  Coming out of the March 30, 2026 low, this A-D Line went up very fast, about as fast as it could travel.  That was a good sign for the strength of the rally.  The fact that the A-D Line in April could not make back all of the damage seen in March should not be held against it.  An A-D Line can never go up faster than a certain rate, even if all of the issues were to go up every day. 

The divergence which concerns me is the more recent one, following a HY Bond A-D Line peak on April 20.  It is the action since then which is telling the more concerning story about liquidity problems suddenly appearing.  Those problems have not yet affected the performance of the SP500, because illiquidity comes first for the weak.  Eventually it comes around for the big animals on the savannah, and that is the concern now with this apparent divergence. 

But let me say this again: This is not a trend change "signal".  It is just a warning of trouble, and one which could get rehabilitated.  It will bear watching in the days ahead, especially as the calendar now transitions into the worst 6 months of the year.