High-Yield Bond ETFs and Rising Rates

September 11th at 4:45pm by Tom Lydon

High-yield, speculative grade, junk bond exchange traded funds hold up against other fixed-income assets in a rising interest rate environment.

The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) gained 1.4% year-to-date and SPDR Barclays High Yield Bond (NYSEArca: JNKis up 1.1%. [How to Play the Sweet Spot in High-Yield Bond ETFs]

Most fixed-income assets have been selling off as yields on benchmark 10-year Treasuries rose from its 1.63% low in May to as high as 3.0% earlier this month. Bond prices and yields have an inverse relationship, so rising rates translate to lower prices. [ETFs for a Rising Rate Environment]

However, junk bonds, a riskier asset, are more correlated to the health of the equities market.

“Certain sectors of the bond market react differently to rising rates,” according to Morningstar senior fund analyst Cara Esser. “For example, more-credit-sensitive bonds, like high-yield corporates, tend to react less negatively to rising rates than do bonds with more interest-rate risk, such as a U.S. Treasuries.”

“For those of you who are worried about rising rates, high yield is likely to continue to outperform relative to other fixed income markets in that environment,” Henderson Global Investors fund managers Chris Bullock, said in a Fundweb article.

HYG has a 5.57% 30-day SEC yield and a 4.25 year effective duration – duration is a measure of a bond’s sensitivity to changes in interest rates. JNK has a 5.91% 30-day SEC yield and a 4.43 duration.

Meanwhile, the iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI), which has a similar duration of 4.44 years and a 1.29% 30-day SEC yield, fell 2.6% year-to-date. Moreover, the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD), which tracks investment grade corporate debt and has a 3.72% 30-day SEC yield and a 7.39 year duration, declined 5.6% year-to-date.

For more information on high-yield debt, visit our high-yield bonds category.

Max Chen contributed to this article.

Full disclosure: Tom Lydon’s clients own HYG and JNK.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.