What High-Yield Bond ETFs are Saying About Stocks
April 5th 2012 at 9:08am by John Spence
High-yield bond ETFs on Wednesday closed below the 50-day simple moving average for the first time since November, which is a warning sign for U.S. stocks.
Some technical analysts watch junk bond ETFs such as iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) as a sentiment indicator for how comfortable investors are with taking on risk. [Junk Bond ETFs Still Say Risk-On]
“As high-yield credit is highly correlated with equities, it’s hardly surprising that the asset class has rallied sharply since fall lows, taking part in the strong rebound in stocks and other risky assets,” says Russ Koesterich, iShares global chief investment strategist, adding that $6.5 billion has flowed into high-yield ETFs year to date. [Are High-Yield Bond ETFs Overbought?]
The junk bond funds are among the top ETF sellers in 2012 with income-hungry investors looking for more options outside low-yielding Treasuries and money market funds. [Popular High-Yield Bond ETFs Stumble]
Year-to-date, junk bond mutual funds and ETFs have garnered over $17 billion in new assets. [Junk Bond ETFs Under the Microscope]
Junk bond ETFs have shown a 68% growth rate over the past year, and added 244% over the past three years, according to a recent report.
Many investors frustrated with low Treasury yields are seeking to add extra income with junk bond ETFs, and the asset class has performed well with defaults staying low.
“Following this rally, the yield to maturity for high yield is roughly 7% or nearly a 500 basis point premium to the 10-year Treasury. That’s close to fair value,” writes Koesterich at the iShares blog.
“Investors in high yield are still picking up significant incremental yield, and given strong corporate balance sheets, I don’t expect any significant pickup in default rates. But as the asset class no longer appears as inexpensive as it was last fall, I wouldn’t advocate aggressively putting new money to work in high yield,” said Koesterich, adding that he prefers investment grade corporate bonds and municipals.
iShares iBoxx High Yield Corporate Bond
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.