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.
“If the trend is your friend, then expect lower yields in the near future,” Horan said. “If however you think next week’s FOMC meeting will be the event that turns the tides then now would be the inversion point.”
Additionally, the yield on the S&P U.S. Issued Investment Grade Corporate Bond Index has also been steadily rising since Oct. 15. The index’s yields rose 14 basis points to 2.77%. Since the Oct. 15 high, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) is 2.2% lower.
Shares iBoxx $ High Yield Corporate Bond ETF
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, JNK.