High Yield credit has staged a near-term rebound that appears to have characteristics that are different than what took place during the March rally for risk assets. These rebounds are taking place from key levels and playing out as there has been an improvement in the relationship between high yield bonds and treasuries. While it is still early, we think that these dynamics are notable. At the same time, the key support levels provide a clear line in the sand that can be used to negate the current rally if they are broken.

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The BofA Merrill Lynch U.S. High Yield Total Return Index has staged a sharp rebound from the support. The support level is interesting because it lines up with the peak that was seen prior to the COVID crash as well as with an area of congestion during the subsequent rally from the March 2020 lows. What we also find interesting is that this rebound is stronger than the one that took place in March. The March rally saw the index move higher by ~2%, while the current rally has seen a move of ~3.8% thus far. Another difference between now and March is that the 14-day RSI has made a higher high while breaking the downtrend that has been in place since last June.

We have noted that there has been an improvement in the High Yield (HYG) vs. Treasuries (IEI) ratio over the past two weeks. The ratio has rallied to reclaim broken support and the 50-day moving average. The next step would be for the ratio to move above the 200-day moving average as a sign that risk appetite in the market is continuing to improve. The 14-day RSI is testing 60 as it tries to break from a bearish regime.

The iShares iBoxx HY Corp. Bond Fund (HYG) has rebounded to retake support at the $78 level. Here too, the current rally is strong than the rally attempt in March, with the 14-day RSI making a higher high after failing to become oversold at the May low. Holding above $78 would be the starting point in reversing the bearish trend that has been in place since the start of the year.

The bearish trend in the VanEck Fallen Angel High Yield Bond ETF (ANGL) has found support near the $28 level, which lines up with the large downside gap that opened in March 2020. Once again, the current rebound is arguably stronger than what was seen in March, as the 14-day RSI has made a higher high and is pressing on the 60 level. If $28 holds as support, there are increased odds that the trend is reversing to the upside.

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