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Stocks and Bonds Making Terrible Music Together

This article was originally published on ETFTrends.com.

The latest stock sell-off appears to also be affecting the fixed-income space, as the capital markets saw outflows in some of the largest fixed-income ETFs within the past week, such as the  iShares Core US Aggregate Bond ETF (NYSEArca: AGG ) , which experienced investor flight to the tune of almost $2 billion.

"I think fixed-income portfolio managers have had their come to Jesus moment," said Janet Johnston, TrimTabs asset management portfolio manager. "They were going with the Fed, not fighting with the Fed. Since 1998, when rates have gone up, stocks have gone up. When rates have gone down, stocks have gone down. We think this is more of a typical market correction."

The lockstep between stocks and bonds as of late is not something typically seen within the capital markets as both are prone to marching to the beat of their own drum. However, the music they are making together lately is something analysts are listening to closely, but something investors would like to ignore.

"Right now, if you look at the correlation between stocks and bond yields, it's at the lowest to turning negative since 2014," said Bloomberg contributor Sarah Ponczek. "That has only happened three times since 2000. Every time that did happen, it was followed by an equity market sell-off so this is something people are going to definitely be watching."

Nonetheless, with financial companies like Citigroup, Wells Fargo and J.P. Morgan Chase scheduled to release earnings tomorrow, positive results will help confirm that the latest sell-off in both stocks and bonds is evidence of a typical market correction.

"We are well within the ranges of a normal market correction," said Johnston. "Next week, you're going to start hearing about good earnings."

Related: Gold ETFs Show Their Mettle as Stocks Slide

High-Yield, Investment-Grade ETFs Rise on Day 2 of Sell-Off

On the second day following yesterday's 800-point slide in the Dow, high-yield and investment-grade fixed-income ETFs managed to go green in another sea of red-- ProShares High Yield—Interest Rate Hdgd (HYHG) rose 0.46% and the iBoxx $ Invmt Grade Corp Bd ETF (LQD) was up 0.48% as of 2:30 p.m. ET.

HYHG tracks the performance of the FTSE High Yield (Treasury Rate-Hedged) Index. and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.

LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.

President Trump Calls Fed Chair's Sanity in Question

Rising rates have been one of the factors to blame for the latest sell-off, and U.S. President Donald Trump has been a vocal critic of rising interest rates, using social media and speaking engagements to denigrate the Federal Reserve's rate-hiking with respect to monetary policy. Just last month, the Fed increased the federal funds rate for the third time this year by 25 basis points and hinted that a rate hike in December is imminent given the growth of the economy.

“I think ... the Fed is making a mistake. They’re so tight. I think the Fed has gone crazy,” Trump said at a political rally in Pennsylvania.

Meanwhile, the Bank of England governor and the head of the International Monetary Fund, Mark Carney, praised the Federal Reserve Chairman Jerome Powell, in particular, during an IMF and World Bank meeting.

“Of the many qualities of Jerome Powell is he’s an individual who really understands the plumbing of the U.S. and the global financial system,” Carney said. "And that’s an incredible advantage for the system at a time that the system is changing to have someone in his position who has that level of technocratic expertise."

Likewise, IMF managing director Christine Lagarde supplemented Carney's remarks, saying that Powell cannot be associated with "craziness."

“No, no, he comes across, and members of his board, as extremely serious, solid and certainly keen to base their decisions on actual information, and decide to communicate that properly,” she told CNBC.

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