November 16, 2009 at 6:00 am by Tom Lydon
As investors become more willing to take on risk, corporate bond exchange traded funds (ETFs) are in turn becoming more appealing. So much so that corporate bond buying this year has set a record.
Worldwide, investors have purchased more than $2.7 trillion of new corporate bonds this year, reports Kate Haywood for The Wall Street Journal. Contrast that with $1.7 trillion in 2008, which is when the financial crisis all but brought the flow of cash to a standstill. (Why junk bonds are in demand).
Junk bond issuers have used about 75% of proceeds from sales to refinance existing debt, the highest proportion since record-keeping began in 1996. Corporate bond sales have been a boon to many companies, giving them a lifeline as they wait for banks to resume normal lending.
“Junk,” or high-yield, refers to a bond rated “BB” or lower because of a high default risk. The main reason junk bonds have had a good year is simply that investors have some risk appetite to spare again, explains Matt Krantz for USA Today. (Other types of bonds that have done well in this market).
After the terror of the March pullback and the major market meltdown leveled off this year, investors began to put their money into investment-grade and junk bonds and took a step back from the safety of government debt.
While junk bonds have higher risk, they will do fine so long as investors risk appetite is steady. If the economy doesn’t heal or if companies increasingly default on their debt, you could find yourself suffering large losses. (When is it time to exit the bond market?)
What can you do about it? Have an exit strategy when the trend turns. (Why stop losses matter).
For more stories about bond ETFs, visit our Bond category.
A sample of such ETFs:
- SPDR Barclays Capital High Yield Junk (NYSEArca:JNK): up 30.9% year-to-date
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG): up 24.4% year-to-date
- Vanguard Total Bond Market (NYSEArca: BND): up 3.8% year-to-date
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