Junk bond ETFs such as iShares iBoxx $High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) continue to ramp higher with the market’s average yield threatening to fall below 5% for the first time ever.
“For a while it was getting boring watching the junk bond market set new record-low yields each day but now at least we have a possible milestone within sight and some drama to look forward to,” says Michael Aneiro at Barron’s.
“The sight of an average junk bond yield with a four handle (market parlance for the first digit being a 4) still sounds absolutely preposterous, but it’s frighteningly close, and frighteningly likely, at this point,” he wrote.
The two junk bond ETFs are already sporting yields below 5%.
JNK and HYG have 30-day SEC yields of 4.83% and 4.62%, respectively. Bond prices and yields move in opposite directions. [Junk Bond ETFs Still Attracting Yield Hunters]
Next page: ‘Not-so-high-yield’ bonds
HYG is up 5% so far this year after posting a total return of about 12% in 2012, according to Morningstar.
Investors have piled into speculative grade corporate debt and the related ETFs in search of yield as the Federal Reserve holds interest rates extremely low. Also, corporate default rates are subdued with companies shoring up their balance sheets after the credit meltdown.
“If we carry on like this, we may have to change the name of the asset class to ‘not-so-high-yield’ bonds,” The Wall Street Journal reports. “Fund managers don’t care. The important number for them is the spread between returns on junk and returns on Treasuries. On that front, junk is still some 4.5 percentage points above Uncle Sam’s paper—a rich premium and well above the crazily tight spread of 2.4 percentage points seen just before the financial crisis.”
The junk bond ETFs have rallied to their highest levels since 2008.
SPDR Barclays High Yield Bond ETF
Full disclosure: Tom Lydon’s clients own HYG and JNK.