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Today, we’re opening a new bearish trade on SPDR Bloomberg Barclays High Yield Bond ETF (NYSEARCA:JNK). There has been a lot of volatility on Wall Street the past few trading days. Much of that volatility has been driven by the CBOE Volatility Index (VIX) and traders trying to cover their short volatility exposure. Mercifully, it looks like a lot of the volatility in the volatility market should start to decrease as we get further into the week. However, not all of the selling has been driven by volatility spikes. Some of it, like that portion that has been driven by rising interest rates, is more structural as the stock and bond markets adjust to a strengthening economy and the prospect of rising inflation. It’s this structural change we’re looking to take advantage of with this trade on JNK.
Junk bonds rallied higher on Tuesday with the rest of the financial markets, but we expect this bounce to be short-lived. As Treasury yields continue to climb, investors are going to continue demanding higher yields on junk bonds, which will continue to push the price of JNK lower and lower. JNK has already dropped below multi-year support at $36.20, and we are looking for it to continue dropping down toward its next support level at ~$35.75.
‘Buy to open’ the JNK March 35 Put (JNK180316P00035000) for a maximum price of $0.35.
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