Worldwide, investors have purchased more than $2.7 trillion of new corporate bonds this year, reports Kate Haywood for The Wall Street Journal. Contrast that with $1.7 trillion in 2008, which is when the financial crisis all but brought the flow of cash to a standstill. (Why junk bonds are in demand).

Junk bond issuers have used about 75% of proceeds from sales to refinance existing debt, the highest proportion since record-keeping began in 1996. Corporate bond sales have been a boon to many companies, giving them a lifeline as they wait for banks to resume normal lending.

“Junk,” or high-yield, refers to a bond rated “BB” or lower because of a high default risk. The main reason junk bonds have had a good year is simply that investors have some risk appetite to spare again, explains Matt Krantz for USA Today. (Other types of bonds that have done well in this market).

After the terror of the March pullback and the major market meltdown leveled off this year, investors began to put their money into investment-grade and junk bonds and took a step back from the safety of government debt.

While junk bonds have higher risk, they will do fine so long as investors risk appetite is steady. If the economy doesn’t heal or if companies increasingly default on their debt, you could find yourself suffering large losses. (When is it time to exit the bond market?)

What can you do about it? Have an exit strategy when the trend turns. (Why stop losses matter).

For more stories about bond ETFs, visit our Bond category.

A sample of such ETFs:

• SPDR Barclays Capital High Yield Junk (NYSEArca:JNK): up 30.9% year-to-date

• iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG): up 24.4% year-to-date

• Vanguard Total Bond Market (NYSEArca: BND): up 3.8% year-to-date

Neuberger Berman LLC Managing Director Thomas P. O’Reilly sees that individual investors turned to high-yield bonds for “competitive returns with better downside protection” than equities, despite economic uncertainty, writes Douglas Appell for Investment News. Ann H. Benjamin, managing director with Neuberger Berman, says high-yield bonds tend to outperform equities during slow economic growth.

Some market watchers note, however, that a bearish economy will likely lead high yields to underperform investment-grade corporate bonds. (Read about how bonds fare vs. stocks).

Investors could buy individual bonds, but high-yield bond ETFs are an easy, low-cost alternative for diversifying an investment portfolio, remarks John Jagerson for Learning Markets. Potential investors should keep in mind that bonds may lose value when markets dip. Rising interest rates and inflation both affect bonds.

High-yield bonds are classified as below investment-grade, with higher risk of default or non-payment. Junk bonds usually pay 7% to 10% more than yields provided by 10-year Treasury notes.

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

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 31.8% year-to-date; yields 12.4%

• iShares iBoxx $ High Yield Corporate Bd (NYSEArca: HYG): up 23.4% year-to-date; yields 9.78%

• iShares iBoxx $ Investment-Grade Corporate Bond (NYSEArca: LQD): up 7% year-to-date; yields 5.3%

Max Chen contributed to this article.

For full disclosure, Tom Lydon’s clients own LQD.

Tom Lauricella of The Wall Street Journal suggests that in general, investors have tended to pay more for bond funds than the portfolios are worth.  He dissects the Vanguard Total Bond Market ETF (NYSEArca: BND), which is up 4% year-to-date.

Since its launch in April 2007, the ETF’s daily closing price has been equal to or above the net asset value (NAV) — or the per-share value of its holdings — 98% of the time, and 36% of the time by a meaningful 0.5% or more. Additionally, Lauricella states that the gaps typically have been much wider for municipal-bond and corporate-bond ETFs, especially those holding low-rated “high yield” bonds.

This also highlights the issue of “index drift.” This was recently seen in the SPDR Barclays Capital High Yield (NYSEArca: JNK). It fell nearly 1% in the year ending Aug. 31 as its benchmark rose 6%. One problem was that the ETF couldn’t get some lower-quality bonds held in the index. Bond ETF providers are aware of the challenges in building bond ETFs, and strive to build them so that their ETFs work optimally.

This hasn’t hurt the popularity of bond ETFs, and they’ve gotten more than half of new cash flowing into ETFs, reports Eleanor Laise for The Wall Street Journal.

This could be because the funds are an immensely easy and efficient way to access what can be an expensive market. They offer the kind of diversification that could be cost-prohibitive otherwise.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

Standard & Poor’s commented that issuers are favoring the high-yield bond market over the leveraged loan market, with 86% of speculative-grade debt in bonds during the first nine months of the year compared to 45% in the same period last year, reports Tess Stynes for The Wall Street Journal.

Issuers are seeking the less restrictive terms and longer maturities offered in bonds. Though, high-yield debt does come with higher financing costs when companies try to refinance. (To read more about using bond ETFs, go here).

Some analysts fear that a new bubble may be forming on Wall Street as investors chase down returns, and some are warning that the hike in bond prices may roll back if the economy stumbles and investors run back to safer investments, writes Jack Healy for The New York Times. Struggling companies would then be forced to pay higher rates to take on more debt or refinance old bonds. (Read more about protecting yourself from bubbles here).

Longtime analysts and fund managers are amazed by the investor interest in bonds this year. The risk premium of bonds over Treasuries, or “spread,” dropped to 7.5% from more than 16% in the beginning of the year. Bond yields are above their historic averages, however.

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 28.6% year-to-date ; yield is 12.9%

• iShares iBoxx $ High Yield Corporate Bd (NYSEArca: HYG): up 20.3% year-to-date; yield is 10.5%

For more information on junk bonds, visit our junk bonds category.

Max Chen contributed to this article.

According to Randall W. Forsyth of Barron’s, the rally has been specifically seen in the credit markets, in particular corporate securities as opposed to lower-risk Treasury securities.

One reason that bond ETFs are remaining attractive it because the credit markets are giving investors a better return than the near-zero return earned in money-market and cash accounts.  Additionally, with the ever-growing number of options available, bond ETFs enable investors to make both bearish and bullish plays on the market.

If the economy improves, corporate credit will benefit. If this happens, Treasury yields are apt to rise. Conversely, if the economy falls short of the bulls’ expectations, Treasury yields may fall but corporate spreads could widen and hurt corporate bond returns. Have a strategy in order to protect yourself.

The iShares iBoxx $ Investment Grade Corporate Bond (NYSEArca: LQD) is up 9.3% year-to-date and has a yield of 5.33%.

The SPDR Barclays Capital High Yield Bond Fund (NYSEArca: JNK) is up 31.3% year-to-date with a yield of 12.9%.

Even municipal bonds have seen a nice uptrend.  Take a look at the iShares S&P National Municipal BondETF (NYSEArca: MUB) which is up 8.7% year-to-date with a yield of 3.63%.  Additionally, State Street Global Advisors recently launched the SDPR Standard & Poor’s VRDO Municipal Bond ETF (NYSEArca: VRD),which is designed to provide investors with access to muni variable-rate demand obligations.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

For full disclosure, Tom Lydon’s clients own shares of LQD.

A study conducted by Matt Hougan and Dave Nadig over at Index Universe indicates this and concludes that the more liquid the underlying market, the lower the average premiums and discounts.

• First, they looked at Treasuries and concluded that investors shouldn’t worry about premiums and discounts in traditional Treasury ETFs. They did find, however, that premiums and discounts got larger as one moved out of the yield curve.

• Next, they looked at agency bonds such as Barclays Agency Bond Fund (AGZ), and concluded that both the average and extreme premiums and discounts were small.

• The third asset class analyzed were Treasury Inflation Protected Securities (TIPs), which are slightly less liquid than the two previously mentioned asset classes, but still resulted in small average and extreme premiums and discounts.

• The fourth class analyzed were blended funds, and the conclusion was that the illiquid corporate exposures had an impact on premiums and discounts.  Of the four blended funds looked at, three traded at a premium every day.

• Premiums and discounts really took off in the corporate bond category, where all four ETFs analyzed traded at average premiums and discounts of 2% and consistently traded at a premium.

• For high-yield bonds, the data suggest that the average premium shrinks, but absolute premiums and discounts increased.

• Lastly, the notoriously illiquid municipal bond category was a bit different, mainly because of the methods that the providers of these funds are using.  Those that utilized cash creations had high average average premiums and discounts. Those premiums and discounts shrink with cash creations.

In conclusion, tighter premiums and discounts can be found in the more liquid fixed income ETFs and are not an issue for traditional Treasuries. As for bond ETFs in general, they enable investors to gain the kind of diversity that would be cost-prohibitive for most small investors to achieve.

For more stories on bond ETFs, visit our bond ETF category.

Kevin Grewal contributed to this article.

Investors can use ETFs for a number of reasons, including to capture capital appreciation and above-average dividends, writes Matthew D. McCall for Seeking Alpha. McCall provides a few ETFs he believes will have the right amount of performance and dividend yields. We should note, too, that this is by no means a complete list of all high-yielding ETFs with good performance – there are many available, so be sure to look around.

SPDR Barclays Capital High Yield Bond (JNK), currently up 23.8% year-to-date, follows corporate high-yield bonds, otherwise known as junk. The ETF also pays out a monthly dividend that comes out to an annual yield of 13%. When the economy goes back to normal, undervalued risky assets could begin to attract more attention.

iShares S&P U.S. Preferred Stock Index (PFF), currently up 27.4% year-to-date, tracks preferred shares of companies, primarily in the financial sector. Annual dividend yield is 11%. The ETF is a good way to tamp down some risk that comes with including the financial sector in an investment portfolio.

Market Vectors High-Yield Muni ETF (HYD), currently up 7.1% in the last three months. HYD is a relatively new ETF that invests mainly in high yield municipal bonds. But around 25% is in investment-grade bonds. HYD has a 30-day SEC yield of 7.16%, which is better than the taxable bonds. Those in the 28% tax bracket will have tax-equivalent yield of 9.94%, and those in the 35% tax bracket will have as much as 11.02%.

It should be noted that HYD is ideal for a taxable account and people in a high tax bracket. JNK and PFF are better for tax-deferred accounts, McCall says.

Always be sure to watch the trend lines first to find areas that have entered into a potential long-term uptrend. Then explore the characteristics of the funds, including volume, assets and yield.

Max Chen contributed to this article.

Last week, high-yield bond funds continued to see strong inflows, notching $162.3 million the week ending Wednesday. It was the third consecutive week of net inflows, reports The Wall Street Journal.

While high-yield bond ETFs rallied off the March low, they also managed to not follow the market south in June. Trang Ho for Investor’s Business Daily reports that the U.S. High Yield Index returned 3.18% for that month, in fact. In the first half of the year, it jumped a whopping 29.4%, the largest six-month return in its 23 years. The U.S. High Yield Index needs to gain just another 5% to return to June 2008 highs.

Investors generally seem to believe that corporate bonds will be a good bet for the second half of this year, says Deborah Levine for MarketWatch. Some might wonder after the run-up if it’s too late, but as long as the trend is there and corporate bonds are right for you, then it’s worth considering. Consult our trend following report for more on using the 200-day moving average as a guide.

• iShares iBoxx $ High Yield Corporate Bond (HYG): up 10.5% year-to-date



• SPDR Barclays High Yield Junk (JNK): up 16.5% year-to-date

For more stories about bonds, visit our bond category.

The yield margins of high-yield bonds over Treasuries are narrowing, as seen on the Merrill Lynch U.S. High Yield Master II index, which shrunk from more than 2.1% in February to 1.2% last Thursday, reports Tom Sullivan for Barron’s.

Demand for these junk bonds have been on the rise and the best performers were in health care and utilities. It is thought that the reason for the rally is that traditional high-yield investors never left the market but stuck it through the toughest of times.

Investors have looked to the riskier single-B securities from the double-B-rated issues. Time will tell if people will be interested in the even more riskier triple-C-rated bonds.

• State Street’s SPDR Lehman High Yield Bond (JNK): up 12.2% year-to-date; 13.6% yield
• iShares iBOXX $High Yield Corporate Bond (HYG): up 5.7% year-to-date; 11% yield
• PowerShares High Yield Corporate Bond (PHB): up 5.4% year-to-date; 11.5% yield

In other bond news:

In California, there is a budget gap of $21.3 billion. The state will cut $5.5 billion soon and a further fill the $26 billion hole over the next two years. The California general-obligation bonds were hovering around 1.5% last Friday.

• iShares S&P California Muni Bond Fund (CMF): up 4.3% year-to-date; 3.6% yield

The Treasury’s two-year note dropped to 0.85% last Friday. The 10-year yield closed at 3.43%. A major concern was over the outlook of a weaker dollar and the potential change in country’s debt rating by the S&P.

• iShares Lehman 1-3 Year Treasury Bond Fund ETF (SHY): down 0.3% year-to-date; 3.3% yield
• iShares Lehman 7-10 Year Treasury Bond Fund ETF (IEF): down 7.7% year-to-date; 3.9% yield

Max Chen contributed to this article.

One eye-catching asset class for intrepid investors is in high-yielding corporate bonds, writes Chance Carson for Seeking Alpha. High-yield bonds, also known as junk bonds, are debt instruments issued by corporations with BBB or lower credit ratings. Interest rates on high-yield debt currently exceeds Treasury bond yields by 18 to 20%. ETFs that provide a glimpse into the world of high-yield bonds include:

• iShares iBOXX $High Yield Corporate Bond (HYG): down 6.9% in the last month; yields 10.6%

• PowerShares High Yield Corporate Bond (PHB): down 10.7% in the last month; yields 12.9%

• State Street’s SPDR Lehman High Yield Bond (JNK): down 6.5% in the last month; yields 13.6%

It should be noted that along with high yields comes a higher risk of default by the issuer. Forecasts put high-yield bond defaults in 2009/2010 around 15%. It is important to understand one’s own risk tolerance since some may have a higher, or lower, level of tolerance for risk.

Another ETF type that provides a blend of Treasury bonds and corporate bonds includes asset classes of Treasury and agency bonds (around 37%), mortgage-backed securities (38%), and investment-grade corporate bonds (25%). These ETFs try to replicate the Barclays Capital U.S. Aggregate Bond Index:

• iShares Barclays Aggregate Bond (AGG): down 3.2% in the last month; yields 4.6%
  

• Vanguard Total Bond Market ETF (BND): down 1.4% in the last month; yields 4.6%
  

• SPDR Barclays Capital Aggregate Bond (LAG): down 3.3% in the last month; yields 4.4%
  

Lastly, investors looking for a 100% investment-grade corporate bond can peruse iShares iBoxx $ Invest Grade Corp Bond (LQD), which is down 2.7% in the last month and yields 5.6%