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%.
In contrast, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) returned 2.6% so far this year while iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) advanced 2.8%.
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.