There is a dramatic shift playing out in fixed-income ETFs as high-yield bond portfolios break out while funds indexed to U.S. Treasuries pull back sharply.
The divergence suggests bond ETF investors are becoming more aggressive and moving away from safe havens. Also, they appear more willing to take on credit risk than rate risk.
SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) and iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) climbed to new 52-week highs last week after the Federal Reserve launched QE3. [High Yield ETFs for a Low Rate Market]
Meanwhile, iShares Barclays 20+Year Treasury Bond Fund ETF (NYSEArca: TLT) is under pressure as yields rise. The ETF has fallen below its 200-day moving average. The long-term Treasury bond ETF hasn’t spent much time below this technical indicator the past three years. [Junk Bond ETFs Break Out; Yields Hit Record Low]
The Fed’s latest round of bond purchases has buoyed market sentiment.
“Although the size of QE3 is considerable smaller than QE1 or QE2,the open-ended structure of the bond-buying program is a new twist in the Fed’s tool kit,” Scott Rubin wrote for Benzinga. [Four Things You Should Know About High Yield ETFs]
According to Morningstar data, the market for high yield ETFs has grown into a $28 billion sector, as assets have grown $12 billion over the past year. HYG and JNK together account for about 90% of the assets. The ETFs offer 30-day SEC yields just shy of 6%. Yields on the 10-year Treasury note are about 1.9%.
PIMCO 0-5 Year High Yield Corporate Bond Index Fund (NYSEArca: HYS) and PowerShares High Yield Corporate Bond Portfolio (NYSEArca: PHB) are other popular ETFs for junk bonds.
SPDR Barclays Capital High Yield Bond
iShares Barclays 20+Year Treasury Bond Fund ETF
Tisha Guerrero contributed to this article.
Full disclosure: Tom Lydon’s clients own TLT, JNK and HYG.