Also, some portfolio managers point out that while junk-bond yields are at historic lows, the spread over Treasury bonds is still reasonable. [High-Yield Bond ETFs: Too Risky After Big Rally?]
Yet the Schwab analysts are warning investors that there may not be much room for high-yield bond prices to maintain their advance.
“Although the average coupon rate of 7.8% may help high yield bonds generate positive total returns, we believe that it will be difficult to generate another year of double-digit total returns in 2013. In fact, we believe that risks to the market have increased,” they wrote.
They also point out that for the first time since 2009, the sub-investment grade market experienced more downgrades than upgrades, even though overall fundamentals have been improving due to companies lowering overall debt levels and boosting cash balances.
“Although the high yield market has generated strong returns over the past two years, we think the risks have increased. We believe total return expectations must be tempered, due to the recent negative trends,” the Schwab analysts said.
SPDR Barclays High Yield Bond ETF
Full disclosure: Tom Lydon’s clients own HYG and JNK.