The largest junk bond ETF is in a seven day rally to break out to its highest level since the financial crisis as investors continue to embrace high-yield funds for income with the Federal Reserve committed to keeping rates low.
The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) has posted a total return of 11% so far this year and attracted net inflows of nearly $5 billion. The $16 billion ETF pays a 30-day SEC yield of 5.7%, according to sponsor BlackRock (NYSE: BLK).
Meanwhile, the $12.3 billion SPDR Barclays High Yield Bond (NYSEArca: JNK) has brought in $2.9 billion of inflows year to date, according to IndexUniverse.
The breakout in high-yield ETFs is positive for equities because they are seen as a fairly reliable leading indicator of the stock market. Still, some technical analysts are worried that the breakout has coincided with fading momentum and volume in the junk bond ETFs. [High-Yield ETF Breakout Holds Key for Stocks]
High-yield bond funds have hauled in a record $69.5 billion of net inflows in 2012 although the category has seen outflows in recent weeks.
“Investors’ infatuation with high-yield-bond funds might have finally run its course, and that could be a sign of an inflection point in fixed-income investing,” reports Jeff Benjamin at InvestmentNews.
The year-to-date inflows are more than double the previous full-year record of $31.8 billion in 2009. Last year, high-yield-bond funds had net inflows of just $8.3 billion, according to the report.
Yet the recent fund outflows and options trading in high-yield ETFs suggest some investors are cashing out or at least hedging their bets. [High-Yield Bond ETF Implied Volatility Skyrockets]
Cameron Brandt, director of research at EPFR Global, told InvestmentNews the recent pattern of outflows could represent a combination of factors, including uncertainty surrounding the looming fiscal cliff, year-end portfolio management or tax-planning strategies. But it also could represent a turning point at which investors are starting to see less value in the category as a result of the pace of inflows.
“When investors start to bail out of high yield they tend to do it with a vengeance,” Brandt said in the article. “It has been a banner year for inflows, and what I see is certainly a degree of discomfort among investors with how fast the asset class has been bought.”
Conversely, some analysts see continued strength in junk bonds simply because there are few alternatives for investors searching for yield in a low-rate market.
“Cash is paying you nothing, and equities are very volatile and uncertain,” Gershon Distenfeld, director of high yield at AllianceBernstein, told InvestmentNews.
iShares iBoxx High Yield Corporate Bond
Full disclosure: Tom Lydon’s clients own JNK and HYG.