JNK (High Yield Bond ETF) and Credit Spread Analysis, How High Does JNK Go? (IEF, TLT, LQD, JNK)

[Update: I originally started this post with $JNK option activity but the massive call volume didn't transfer to open interest. I'm thinking it could have been gaming the monthly dividend (dividend capture using covered calls)]

In my opinion, these high yield ETFs aren't worth the fight until yields break out or people re-price credit risk on an event. These rising wedges and ceiling tests keep breaking out to the upside.  I was surprised to see HYG (more liquid high yield ETF) and the S&P leveraged loan index so resilient during all of 2009. You have to respect ZIRP (zero interest rate policy)! By the way, the Fed Funds rate is still lounging between 0-0.25% (Fed statement, April 28). So how high does the value of junk go from here?

Junk Picks Investors Should Buy Include BB, B Bonds, Aviva Says - Bloomberg (5/3)
Junk Bond Sales Set Record as Investors Waiver: Credit Markets - Bloomberg
US junk bonds could return 13 pct in 2010 -Barclays - Reuters

Junk Bonds Back To 2007 Levels, Merrill Lynch HY Index Approaches Par - Forbes

I'm also watching credit spreads through Bond and Treasury ETFs. If TLT (20+ Year Treasury ETF) and IEF (7-10 Year Treasury ETF) break out it would mean yields are moving lower and, if credit risk remains irrelevant, junk bonds could continue to rally. Also keep in mind that bonds in TLT and JNK have different durations which affect the price/yield relationship [1][2].  At some point though imo (months or years), high yield bonds will sell off when the "risk free rate" gets re-priced.  This recent Forbes video gives a similar explanation: Low Expectations For High-Yield ETFs.

Look at $JNK rising in a long term rising wedge and testing a near term ceiling resistance level. JNK took out early 2008 resistance and is still riding the 50 day moving average up 74% from the March low!  I'm not saying anything..... As of 9/30/2010, the current yield on JNK is 8.79% (SPDRs), the average coupon is 9.28%, average credit quality is B2, average maturity is 6.31 years and modified adjusted duration is 4.61 years.

TLT seems to be breaking out to the upside and possibly IEF.  LQD (investment grade bond ETF) is also up big.  Is David Rosenberg about to be right on the direction of Treasury yields (Jim Grant vs. David Rosenberg debate, link)?  If bonds do break out here, will JNK diverge or run with TLT, IEF?

JNK (SPDR Barclays High Yield ETF) (Courtesy of Stockcharts.com)

TLT (iShares Barclays 20+ Year Treasuries) (Courtesy of Stockcharts.com)

IEF (iShares Barclays 7-10 Year Treasury ETF)

JNK vs. TLT, IEF, LQD (the credit spread journey)