With the economy picking up, investors are becoming bolder by pouring money into junk bonds. But junk bonds are a risky field to play. Fortunately, exchange traded funds (ETFs) can help you manage risk if you want to take some on.
According to John Detrixhe of The China Post, companies sold a record $33.7 billion of junk bonds in April. Moody’s estimates that junk bond issuances will surge 10% for the year while investment-grade bond issuances will drop 7%.
Data from Bank of America Merrill Lynch shows that the yield spread between junk bonds and government bonds rose for the first time since Feb. 26, 2010, possibly reflecting investor sentiment on the state of the EU and the SEC’s investigation of Goldman Sachs. [Tom Explains Why He’s Bullish.]
Specifically, the yield spread on junk bonds widened 17 basis points to 561 basis points.
The strong market for new junk bonds is lowering default risk, reports Dena Aubin of Reuters. The junk bond default rate is expected to drop to 3% this year, down from an earlier forecast of 5%.
Helping the junk bond market is all the turmoil surrounding the European Union’s credit ratings. Investors are seeking a safe haven in the form of U.S. government bonds, thus pushing yields lower. Typically, higher government yields will attract investor money away from riskier junk bonds. [6 ETF Opportunities.]
In light of recent developments, Barclays reports that junk bonds may return 12% to 13% in price appreciation, up from an earlier forecast of 7% to 8%.
For more stories on bonds, visit our bonds category.
- iShares iBoxx $ High Yield Corporate Bond (NYSEArca: HYG)
- SPDR Barclays Capital High Yield Junk (NYSEArca: JNK)
Sumin Kim contributed to this article.
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.