After retail investors dumped high-yield bonds and related exchange traded funds, institutional investors have stepped up, arguing that the junk debt market remains healthy and now appears cheaper than before.
Since the August 1 low, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) have increased about 2.5%. [Junk Bond ETFs Shake Off the Sell-Off]
Junk bond funds and ETFs experienced $13 billion in outflows as skittish retail investors exited the market over the four weeks ended August 6, the Wall Street Journal reports.
Now, institutional investors are stepping back in. For instance, Gershon Distenfeld, director of high yield for AllianceBernstein, said his firm has been acquiring speculative-grade debt of home builders and high-end retailer, betting they will benefit as the economy expands.
“Investors who panic in these selloffs—it’s the wrong thing to do,” Distenfeld said in the article.
The yield on Bank of America Merrill Lynch’s U.S. High Yield index, a benchmark covering a U.S. junk bonds, rose to 5.94% on August 1 from 4.85% on June 24 as investors dumped junk debt. Michael Contopoulos, head of high-yield credit strategy at BofA, said institutions added to their holdings as yields rose, with some feeling that they were adequately compensated for the risk.
Credit risk remains low. Standard & Poor’s calculated a 1.5% default rate in U.S. corporate high-yields this June and projects a 2.7% default rate by June 2015. In comparison, the the average rate is 4.4% for the past three decades.
“There really is no good reason why high yield sold off in the first place” this summer, David Mazza, head of research in the ETF unit at State Street Global Advisors, said in the article. “Nothing changed in the outlook for defaults.”
HYG credit breakdown includes some low investment-grade quality BBB-rated bonds 5.0% but the majority is in speculative-rated debt, including BB 49.9%, B 29.8%, below B 11.8% and not rated 3.5%. JNK credit breakdown includes BBB 1.22%, BB 3.9%, B 43.8% and CCC or lower 19.1%.
However, some observers are less optimistic. According to BlackRock, about 21% of outstanding shares in HYG are short bets, or bets the price will fall. [Traders Pay up to Short Junk Bond ETFs]
iShares iBoxx $ High Yield Corporate Bond ETF
For more information on speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of JNK and HYG.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.