“Global junk bond issuance is at record highs this year—and thus at the greatest danger should yields start rising,” reports Jeff Cox at CNBC.com.
Investors have already reacted to hints the Fed may scale back its QE program by punishing the riskiest bonds, including high-yield ETFs.
Still, some analysts say it would be premature to give up on high-yield credit, as long as investors are cognizant of the potential risks.
These risks include credit spreads widening and higher corporate default rates. [High-Yield Bond ETFs: S&P Still Sees Opportunities]
“High yield spreads are historically tight, at levels not seen since the fall of 2007 … meaning there’s currently a much smaller difference in yield between a high yield bond and a comparable Treasury,” Russ Koesterich, BlackRock chief investment strategist, said in May. “At the same time, some high yield prices have reached all-time highs. In other words, investors aren’t being rewarded that much for holding high yield, traditionally viewed as a risky asset class.”
However, he doesn’t think investors should abandon their allocation to high-yield bonds. The strategist said high-yield companies aren’t so junky anymore, all bonds look expensive, there are few alternatives for yield, and that the asset class isn’t as volatile as it used to be. [iShares: Four Reasons to Still Hold High-Yield ETFs]
iShares iBoxx High Yield Corporate Bond
Full disclosure: Tom Lydon’s clients own HYG and JNK.