Yields in junk bond ETFs are threatening to fall below 5% for the first time ever as strong demand for speculative-grade corporate debt in a low-rate environment keeps pushing yields down.
The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) is paying a 30-day SEC yield of 5.00%, according to BlackRock, while SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) sports a 30-day SEC yield of 5.13%, according to State Street.
Junk bond ETF yields are at record lows as many large investors position for a pullback in this hot fixed-income sectors. Bearish bets against high-yield bond ETFs hit all-time highs this month and the activity appears to be partly driven by Wall Street credit brokers who are offering large trades to clients. [High-Yield ETFs: Credit Traders Help Drive Record Short Interest]
HYG has seen a 50% increase in short interest the past month, the Financial Times reports. High-yield ETFs provide a diversified, easily traded vehicle for going long or short on the sector.
“It takes a long time to build a bond portfolio,” said Edward Marrinan, head of macro credit strategy at RBS, in the report. “You don’t want to dismantle your portfolio, given you killed yourself to build it, so what you do is use a lower-cost, more liquid instrument to hedge it.”
Investors have flocked to junk bonds in search of income with the 10-year Treasury note currently yielding less than 2%, while CDs, savings accounts and money market funds are paying essentially zero. High-yield bond ETFs are seen as a play on a recovering economy while corporate defaults remain low, and companies have repaired their balance sheets in the wake of the financial crisis. [Junk Bond ETFs: Yields Fall to New Record Low]
HYG and JNK are trying to break out to their highest levels since 2008. However, some analysts say it’s mathematically impossible for the funds to increase much further in price, and rising interest rates are another risk for the asset class. [High-Yield ETFs Eye Multiyear Highs; ‘Gravity’ About to Kick In?]
iShares iBoxx High Yield Corporate Bond
Full disclosure: Tom Lydon’s clients own HYG and JNK.