After the sell-off in the speculative grade debt space, junk bond exchange traded funds are jumping back, with large banks pointing to cheap valuations in the high-yield market.
Citigroup (NYSE: C) and Bank of America Merrill Lynch (NYSE: BAC) both believe that it is time to add exposure to high-yield now that prices are cheaper after high-yield junk bond funds and ETFs experienced a record $7.07 billion in outflows for the week ended August 6, reports Patti Domm for CNBC.
“Normally, when you see a spread backup, in theory, it should be related to fundamentals, but fundamentals have been good, not bad, since the selloff that started in June,” Citigroup’s Stephen Antczak, head of U.S. credit strategy, said in the article.
Antczak noted that the credit default rate for a single-B issuer dipped 5 basis points to 0.50% since June. [Healthy Corporate Finances Support Junk Bond ETFs]
The BofA strategists contend that the recent pullback was technically driven on a “fatigue of ‘leaders'” and not due to fundamentals. The strategists anticipate high-yield debt will experience a 7% to 8% total return this year. Year-to-date, HYG is up 3.9% and JNK is 4.2% higher. HYG has a 4.84% 30-day SEC yield and JNK comes with a 5.26% 30-day SEC yield.
“We think the selloff now appears overdone and the fundamental case for investing in HY remains compelling: the Fed is committed to keeping rates low well into 2015, interest coverage is at record highs,” BofA Merrill Lynch strategists said.