High-yield bond exchange traded funds held their ground Friday after a dismal employment report even though some wealth managers are warning investors that the current yields no longer justify the risks involved.
In any case, investors should keep an eye on speculative-grade corporate debt for warning signs in the credit markets that investors are losing their tolerance for risk. In other words, junk bond ETFs can be the canary in the coal mine.
The junk bond ETF SPDR Barclays High Yield Bond (NYSEArca: JNK) rose slightly Friday after witnessing significant trading volume the previous session. JNK has a 5.04% 30-day SEC yield.
“Global investors have found themselves in a situation where first cash rates were unattractive, then government bonds, then investment-grade bonds and now high-yield bonds,” Tom Becket, chief investment officer at PSigma Investment Management, said in a Financial Times article. “People talk about opportunities in high yield because on a relative basis it looks good. At the moment the world is enjoying low inflation and we have very low interest rates, but at some point those things will change and that poses a risk.”
Fund managers are warning investors that quantitative easing policies have artificially pushed up demand and prices on high-yield bonds, which have in turn put downward pressure on yields. While investors have been rewarded for taking on riskier junk bonds in the past, the current yields at around 5% may no longer support the risk.
Over the first quarter, investors funneled $133 billion into junk bonds around the world, reports Floyd Norris for the New York Times.
The Bank of America Merrill Lynch U.S. High Yield Index yielded 5.7% as of the end of the first quarter, compared to 6.1% at the end of 2012 and 8.3% at the end of 2011.
Peter Tchir of TF Market Advisors points out that current junk bond ETF prices are going down even as yields remain the same, reports Michael Aneiro for Barron’s.
“That to me indicates that the net asset values on the high-yield ETFs in particular should drift down,” Tchir said.
The prices typically drift lower as the bonds shed coupon payments accrued each month. However, prices have been moving higher as investors keep piling in. Tchir argues that these ETFs “really cannot go much higher because of the portfolio they hold.” [High-Yield ETFs Eye Multiyear Highs; ‘Gravity’ About to Kick In?]
Other junk bond ETFs include:
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG) 4.87% 30-day SEC yield
- SPDR BarCap Short Term High Yield Bond ETF (NYSEArca: SJNK) 4.19% 30-day SEC yield
- PIMCO 0-5 Year High Yield Corporate Bond Index (NYSEArca: HYS) 3.52% 30-day SEC yield
SPDR Barclays High Yield Bond
For more information on speculative grade debt, visit our junk bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own JNK and HYG.