Exchange traded funds tracking high-yield corporate bonds are pushing to the highest levels seen in the aftermath of the 2008 financial meltdown. Some portfolio managers say the asset class remains undervalued due to the overly pessimistic view on the economy and investors’ preference for U.S. government bonds.
High-yield or “junk” bond ETFs such as SPDR Barclays High Yield Bond (JNK), iShares iBoxx High Yield Corporate Bond (HYG) and PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) have enjoyed a sharp rally that started in late November. [Are ETFs Impacting High-Yield Bond Prices?]
Investors starved for income have moved into high-yield ETFs. For example, iShares iBoxx High Yield Corporate Bond ETF sports a 12-month yield of 7.6%. Yields on the 10-year Treasury note are hovering around 2% with investors herding into U.S. government debt on the Eurozone crisis and recession jitters.
Doug Forsyth, managing director and portfolio manager of Allianz AGIC High Yield Bond, told Morningstar that investors are being “well-compensated” by the yields and capital appreciation potential of high-yield bonds, according to an interview published Friday. [ETF Spotlight: High-Yield Bonds]
“For high-yield bonds, the marketplace is pricing in a prolonged recession and much higher default rates. This has put pressure on the prices of these bonds to move lower and has raised their yields,” Forsyth said in the article. “High-yield bonds do carry additional risks versus high-quality bonds, primarily default risk, but the risk of high-yield defaults is actually notably low.”
The portfolio manager pointed to several factors, including companies flush with near-record amounts of cash on the books and a low-leverage environment. [ETF Focus: Corporate Bonds]
SPDR Barclays Capital High Yield Bond is up 6% for the trailing three-month period.
Junk bond ETFs may also be less sensitive to a rise in interest rates.
“When rates rise, it’s usually because the economy is improving—good news for high-yield issuers, who are generally more economically sensitive,” WSJ.com’s Total Return blog reports. “But high-yield bonds actually have less sensitivity to interest rates because of the possibility of default, which lowers the chance that high-yield bonds will be held to maturity. As a result, junk bonds are less sensitive to rising rates than other bonds and usually outperform other bonds when rates rise.”
SPDR Barclays High Yield Bond
