Without the feared and widespread energy sector defaults, fixed-income investors have been pouring back into high-yield speculative-grade debt and junk bond exchange traded funds.
According to Bank of America Merrill Lynch, junk bond funds have attracted a net $12.2 billion so far this year, reports Jeff Cox for CNBC. Additionally, Morningstar data showed that the previous six weeks before the most recent week had the largest level of inflows to junk funds since the financial crisis.
Looking at some of the largest junk bond ETFs, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has brought in a net $1.3 billion and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) attracted $915.3 million in assets year-to-date, according to ETF.com. [Junk Bond ETFs Attract More Inflows Despite Potential Risks]
Moreover, high-yield bond funds have been outperforming. Year-to-date, HYG rose 2.1% and JNK increased 2.6%. In contrast, the broad iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which tracks the Barclays US Aggregate Bond Index, added 1.4% so far this year while the SPDR S&P 500 ETF (NYSEArca: SPY) gained 1.8%.
Supporting the return to junk bonds after the sell-off over the second half last year, the perceived default risk in energy-related junk debt, which make up about 15% of the high-yield market, never materialized. Through March 23, 2015, only one company with publicly traded debt, Quicksilver Resources, filed for bankruptcy, ValueWalk reports.
According to Moody’s, default risk was only at 1.7%, compared to 17.3% in march 2009, with 184 issuers on the junk list, compared to 290 issuers in 2009.
Consequently, investors are now focusing back on growth and the U.S. economy.
“We continue to expect the high-yield market to outperform investment-grade for the remainder of the year,” David Sekera, corporate bond strategist at Morningstar, said. “Based on our expectation that GDP growth in 2015 will range between 2.0 percent and 2.5 percent, macroeconomic fundamentals in the United States should be generally supportive of credit risk and dampen defaults through the rest of the year. The combination of modest economic growth and low interest rates should keep default rates from rising meaningfully this year.”
Some others have also warned of higher default rates later on, but risks are manageable. According to Dan Roberts, Head of Global Fixed Income at MacKay Shields, believes default rates will rise to 2.75% this year, with highly levered energy production operators in shale formations most likely at risk in the event of continued oil price pressures.
For more information on speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article.