High-yield bond ETFs were fashionable in 2012 although so far this year the funds have seen outflows as Treasury yields tick higher.
Banks continue to underwrite massive amounts of high-yield debt but there are fears investors could get burned if the Federal Reserve scales back on its purchases of Treasury bonds and interest rates rise.
“The risks to investors are less about the bonds’ creditworthiness and more about benchmark government borrowing rates that eventually must rise after falling to a three-decade low,” Bloomberg News reports Wednesday.
“The rate environment is probably more of a risk today,” said Marc Warm, head of U.S. high-yield capital markets at Credit Suisse Group, in the article.
Junk bond ETFs have seen their assets explode to $30 billion in less than six years. Last year investors funneled $33 billion into mutual funds and ETFs that invest in high-yield debt. The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays Capital High Yield Bond (NYSEArca: JNK) are the largest junk debt ETFs.
The rally in junk bonds has pushed the average yield on speculative grade bonds below 6% for the first time ever. However, high-yield spreads relative to Treasuries aren’t flashing bubble-like conditions at the moment.
Instead, the worry is that rising Treasury yields would hit bonds across the board.