The largest high-yield bond ETFs are currently yielding less than 5% after a strong run-up in price but S&P says the fixed-income sector still offers opportunities if investors are mindful of the risks.
Junk debt ETFs such as iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) logged net inflows of nearly $10 billion last year although purchases have slowed in 2013.
“We think the strong demand for these fixed income offerings is tied to the low interest-rate environment and corporations generating record profits in the first quarter of 2013,” said Todd Rosenbluth, S&P Capital IQ director of ETF research, in a note this week.
Companies have tapped the demand for yield with new corporate speculative-grade bond issuance hitting a record $98 billion in the first four months of the year.
Investor hunger for yield has also narrowed the yield spread between Treasuries and junk debt in 2013.
The speculative-grade spread has declined approximately 20% from 554 basis points at the beginning of 2013, according to S&P. Relative to the last five years, the speculative-grade spread is 39% below the 745 basis points average.
Rosenbluth said the tight spread is the result of historic low yields in the 10-year Treasury and investors growing more optimistic about corporate earnings.