Investors have piled into speculative-grade debt and junk bond exchange traded funds since the credit crisis. However, some caution that as investors bought up the fixed-income asset, all the value has been squeezed out, leaving many exposed to greater risks.
Jeffrey Gundlach, head of DoubleLine Capital LP, argues that with borrowing costs for junk-rated companies touching a record low, speculative-grade debt no longer provides enough of a buffer to hedge against rising Treasury yields, Bloomberg reports.
“They’ve squeezed all the toothpaste out of the tube,” Gundlach said in the article. “There is interest-rate risk that’s just being masked by fund flows holding up the prices of junk bonds.”
Junk bonds have gained 148% since the end of 2008 as loose monetary policies pushed investors into high-yield assets in search of income. Globally, there is now $1.97 trillion in junk bonds, compared to less than $1 trillion in March 2009. [Investors Flocking to High Yield Bond ETFs]
Over the past five-years, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has produced an average annualized return of 15.1% while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) rose 17.3%. HYG now has a 4.48% 30-day SEC yield and JNK has a 4.87% 30-day SEC yield.
Junk bond investors are demanding 3.78 percentage points more than similar-maturity Treasuries as of March 5, the lowest spread since 2007. Some argue that the difference does not adequately cover the risk.