Consequently, the problems in the Eurozone have weighed on the international high-yield ETF, the Market Vectors International High Yield Bond ETF (NYSEArca: IHY), which includes a 38.2% exposure to the Eurozone, along with 52.9% to the U.S., is down 4.2% over the past three months. Other international junk bond ETFs with heavy Europe exposure have also faltered, with the iShares Global ex USD High Yield Corporate Bond ETF (NYSEArca: HYXU) down 8.0% and SPDR Barclays International High Yield Bond ETF (NYSE: IJNK) down 4.1%.
Gallo also warns that many investors are in the same trade, with the high-yield, junk bond market growing overcrowded.
Lastly, the junk bond market is notoriously known for its liquidity issues, and with a crowded market, the exit door looks small.
“Some investors, such as BlackRock, are calling for a radical reform of bond markets, to improve standardisation and liquidity,” Gallo said. “But for now, the dealers’ capacity to absorb volatility remains limited.”
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 HYG, JNK.