Michael Salm, co-head manager at Putnam Investments, believes that the falling oil prices could translate to higher corporate defaults among junk-rated energy companies.
Additionally, some fixed-income observers are growing concerned about liquidity in the corporate bond market where new regulations and capital requirements since the financial crisis forced Wall Street banks to cut their inventories, which has significantly reduced the number of matching buyers and sellers.
“Everyone sees the lack of liquidity as a potential risk in the corporate bond market,” Sumit Desai, the lead analyst for corporate credit funds for Morningstar, said in the article. “But there hasn’t been a major event to test the market.
Year-to-date, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest junk bond ETFs by assets, increased 3.9% and 3.6%, respectively. The iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD), which tracks investment-grade debt, gained 7.8% so far this year.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.