In the second week of this month, companies with debt rated as junk issued a record $11.7 billion in bonds. The issues were met by eager investors looking for yield and feeling more at ease with risk. Is the frenzy sending early warning signs of an exchange traded fund (ETF) bubble?
Standard & Poor’s expects defaults among junk-rated companies to decline to 6.9% of total junk bond issuance by September, down from 10.9% in December. S&P reports that there are 151 U.S. companies with speculative-grade ratings, and another 74 companies overseas with such ratings. These companies are at a higher risk of defaulting than the general universe of companies rated as junk, reports David Bogoslaw for BusinessWeek. [Other reasons junk bond ETFs are in favor.]
Defaults are expected to slow down this year as the U.S. economy recovers and the record levels of debt exchanges last year, which pushed out maturities for many companies, lay in the wake. [Why high yield is in demand with bond investors.]
It’s easy to see why high-yield debt is so appealing right now: interest rates elsewhere are at rock-bottom and confidence in the broader economy is making a comeback, says Jim Gallagher at the St. Louis Post-Dispatch. If you wish to dabble in the high-yield bond market, know the risks and have a strategy to get out if the going gets rough. [How to follow trends.]
For more stories about bond ETFs, visit our bond ETF category.
- iBoxx $ Liquid High-Yield (NYSEArca: HYG)
- PowerShares High Yield Corporate Bond (NYSEArca: PHB)
- SPDR Barclays Capital High Yield Bond (NYSEArca: 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.