Speculative-grade, junk bonds and related exchange traded funds are outperforming in the fixed-income market as energy junk bonds enjoyed a decent rebound in the wake of a strengthening oil market.
Year-to-date, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) rose 4.1%, iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) gained 3.3% and AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) increased 4.2%.
Leading the charge, U.S. junk-rated energy bonds have returned 6.4% year-to-date, the best performance for the period since the securities recovered from the financial crisis six-years ago, reports Lisa Abramowicz for Bloomberg.
Some observers argue that the junk bond market can maintain its momentum. With oil still trading at half of last year’s peak, market watchers anticipate higher prices will extend the bond rally.
Junk bond ETFs, which hold about 10% to 15% in energy-related debt, pulled back after the plunge in oil prices raised credit concerns on some of the riskier loans from the nascent U.S. shale oil industry. For instance, HYLD includes a 7% tilt toward oil exploration & production, 1% in oil refining & marketing and 2% in oil services.
However, the massive defaults from the energy sector never manifested. According to Standard & Poor’s rating agency, junk bond defaults were at 1.8% in February, compared to the long-term average of 4.4%. Additionally, the ratings agency expects the trailing 12-month junk bond default rate to only rise to 2.5% at the end of the year.
With default concerns abating, more investors are returning to the market. For example, Stephen Schwarzman, who runs Blackstone Group LP, expects the world’s biggest distressed-debt investment firm to also buy into the rally.[Default Fears Abate, Investors Return to Junk Bond ETFs]
“We are quite busy in the fixed-income area with energy,” Schwarzman said on Bloomberg. “If you are financing energy companies that have a need for money, and you can make a satisfactory arrangement, that is a good place to be.”
SPDR Barclays High Yield Bond ETF
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.