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.
Additionally, Liang points out that credit risk in the junk bond market is low as many new issaunce has been refinancing related instead of the traditional leveraged buyout or merger and acquisition deals. Moody’s 12-month global speculative-grade default rate was 2.3% in May, down from 2.8% for the same time last year. The ratings agency expects default rates to dip to 2.1% by the end of the year.
“Refinancing is nice, low risk use of capital, but also it turns out the maturity profile of the market,” Liang added. “This is being reflected in the low default rate we see in the high-yield market. That low default is probably here to stay for a couple of years.”
For more information on the bond market, visit our bond ETFs category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of HYG and JNK.