High-yield bond exchange traded funds rallied this year after benchmark rates dipped and can continue to gain momentum as corporate America grows.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) is up 5.0% year-to-date while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) gained 5.4%. [Indexology: High Yield Bonds: Can more juice get squeezed out of the junk bond sector?]
“Historically, high yield tends to behave more like stocks than bonds,” Jonathan Liang, senior portfolio manager for fixed income at AllianceBernstein, said in a CNBC article. “Treasurys will definitely be face considerable headwinds, but some more economically sensitive sectors such as high yield, may see more resilience.”
Some observers have warned that high-yield bonds are looking expensive as yields plunged – bonds and rates have an inverse relationship, so a falling yield corresponds with rising prices. THe Merrill Lynch Global High-Yield Constrained Index currently yields around 5.05%, down from a 52-week high of 6.72%. [Fed Speak Reignites Love for Big Junk Bond ETF]
However, others argue that junk debt is over priced if we were expecting a correction. Investors, though, mostly expect interest rate increases to remain muted over the medium term.