High-yield debt securities and bond-related exchange traded funds have been gaining momentum on the market’s risk-on mentality and could shake off the Federal Open Market Committee’s decision next week.
In a note, Kevin Horan, Director of Fixed Income Indices at S&P Dow Jones Indices, argues that the high-yield bond market will likely shrug off the FOMC’s decision next Wednesday, October 29.
On October 6, the S&P U.S. Issued High Yield Corporate Bond Index, which tracks USD-denominated U.S.- and foreign-issued high-yield corporate bonds, saw yields fall as low as 5.87% – bond prices have an inverse relationship with yield, so a falling yield corresponds with higher prices.
The market, though, sold off and saw yields jump to 6.51% on Oct. 15, or up 65 basis points from Oct. 6 and higher than the 6.13% at the start of the month. Nevertheless, ever since Oct. 15, traders have shifted back to a risk-on mentality and pushed yields 60 basis points lower to 5.91%.
So far this month, the high-yield bond index has increased 1.09%. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) is up 1.13% month-to-date while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) is 0.87% higher. [Junk Bond ETFs Look Attractive After the Bloodletting]
Since Oct. 15, HYG gained 2.9% and JNK rose 2.5%.
In contrast, the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index saw yields inch up to 2.28% from a low of 2.13% on Oct. 15, the lowest point this year. Since the Oct. 15 high, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) has dipped 3.0%. Nevertheless, the index’s yields have been stuck in a down trend, falling 75 basis points year-to-date.