“If you look at interest coverage, which is probably the single most important metric in the high-yield market—so the ability of a firm to ultimately make the interest payment on its debt through earnings—it’s at all-time-high levels,” Contopoulos said. “And this is why companies default, because they can’t pay interest expense.”
Nevertheless, investors should keep in mind that junk bonds are still riskier than investment-grade securities. For instance, JNK’s fund quality includes speculative grade BB 36.4%, B 43.9% and CCC or lower 18.9%. HYG’s credit quality breakdown includes BB 49.6%, B 28.8% and CCC or lower 18.4%.
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.
Full disclosure, Tom Lydon’s clients own shares of HYG and JNK.