On the one hand, sterling corporate bond prices have been rising. This has been pushing yields down, causing some to second guess whether corporate bonds are the place to be. (More on the corporate bond ETF wave). If this turns out to be the case, then a massive selloff could result, states Matthew Vincent of The Financial Times.

However, analysis of corporate bond spreads tells a different story. Spreads, better known as the difference between the yields on corporate bonds and on safer government bonds,  widened to record levels after Lehman Brothers collapsed last year.

Corporate bond prices fell rapidly in anticipation of widespread defaults by other issuers. This pushed the effective yields from bonds’ fixed-income payouts up toward double figures, suggesting that they are not overbought.  To add icing to the cake, it appears that supply for these bonds, in particular the more risky junk bonds, cannot keep up with demand. (What you should know about junk bond ETFs).

An easy way to access the junk bond market is through the following ETFs:

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

• iBoxx $ Liquid High-Yield (NYSEArca: HYG): up 22.2% year-to-date and has a yield of 9.9%

• PowerShares High Yield Corporate Bond (NYSEArca: PHB): up 18.1% year-to date and has a yield of 9.3%.

• SPDR Barclays Capital High Yield Bond (NYSEArca: JNK): up 31% year-to-date and has a yield of 12.4%

Kevin Grewal contributed to this article.

Investors are satiating their hunger for riskier stocks by buying up companies that are in terrible shape, remarks Ben Steverman BusinessWeek.

After the market low of March 9, the S&P 500 is up more than 35% and traders are throwing money at the weakest stocks. The top 100 stocks within the S&P have total debt of more than $4 trillion while the 100 worst performers have $746 billion in debt.

The current junk stock rally is seen as a natural event that would occur after a thorough beating of the equity markets. The rally has also hurt investment managers who kept to a conservative strategy and portfolio managers are now inclined to abandon that strategy to follow current market flows.

The same situation is leading investors back to junk bonds, as well.

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.

But will this rally be sustainable for the long-term investor? While some low-quality stocks could benefit from the recovery, some others may not fare so well. It is important to know that there is a lot of risk involved when investing in these types of stocks and a potential investor should follow some due diligence before jumping in. As always, have a strategy in place that you will stick to in order to protect yourself from the possibility of unlimited losses.

• State Street’s SPDR Lehman High Yield Bond (JNK): up 15.9% year-to-date

• iShares iBOXX $High Yield Corporate Bond (HYG): up 9.1% year-to-date

• PowerShares High Yield Corporate Bond (PHB): up 8.9% year-to-date

Max Chen contributed to this article.

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.

With the announcement of bankruptcy by Chrysler LLC and the a surge in corporate defaults in April, junk bonds had their best performance in more than two decades, states Randall Forsyth of Barron’s.  The PowerShares High Yield Corporate Bond ETF (PHB), which has a whopping yield of 11.46%, gained 8.9% over the last month.

On the other end of the spectrum, Treasuries got slammed  as the Federal Reserve’s plan to buy over $1 trillion of government, agency and mortgage-backed securities was undercut by reduced demand by investors and the inundation of Treasury auctions to finance the budget deficit.  The iShares Barclays 20+ Treasury Bond ETF (TLT), which dropped 8.4% over the last month.

In general, corporate sectors and Treasuries move in tandem; however this case is an exception because of  wide corporate spreads and low Treasury yields.

To add to the slow demise of the Treasury market, many investors are starting to steer away from Treasuries.  Granted, these investment tools held up fairly well during the financial crisis of the previous year, but many believe that they are just not appealing.  Short-term bonds yield a small 1.9% and long-term bonds are coming under serious risk from inflation, states Brett Arends of The Wall Street Journal.

In times of deflation, Treasuries hold up fairly well.  However, in times of inflation, the minuscule returns offered by Treasuries are often eaten away and go into the red.

It is always a good idea to remain diversified, keep a balanced portfolio and watch the trend lines.

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

Kevin Grewal 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%

Dealing with individual issues of high-yield bonds is often difficult because of issuer and liquidity risk, which makes some sort of fund the most common choice.

Roger Nusbaum for TheStreet theorizes that because of the nature of ETFs, they would be a less volatile method of entering the high-yield market than most closed-end funds. With closed-end funds having a set amount of shares, the market price can drift from the net asset value. This can result in closed-end funds falling more than expected in times of extreme change in the market. On the contrary, ETFs can create or redeem shares based on demand, which allows for the market price to stay closer to the net asset value.

With market volatility and amid turmoil, high-yield ETFs fared well relative to closed-end funds. ETFs such as the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) have proved that they can withstand bear markets by practically sitting out the panic that occurred in mid-March. However, it will be interesting come the next bull market or economic expansion to see how ETFs and closed-end funds compare.

Some high-yield bond ETFs include:

• iShares iBoxx $ High Yield Corporate Bond Fund (HYG), down 3.1% year-to-date
• SPDR Lehman High Yield Bond (JNK), down 5.3% year-to-date
• PowerShares High Yield Corporate Bond (PHB), down 6.9% year-to-date