While the speculative-grade debt market is still susceptible to default risks, mainly from the energy sector, fixed-income investors may find cheap value in junk bond exchange traded funds if they are willing to sit through the potential volatility.
For instance, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), which has a 4.01 year duration, comes with a 5.26% 30-day SEC yield and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which has a 4.17 duration, shows a 5.77% 30-day SEC yield. [Junk Bond ETFs Try to Shake Off Energy Pullback]
Even after the recent bounce back in U.S. energy junk bonds, speculative-grade energy debt remain depressed, reports Robin Wigglesworth for the Financial Times.
Specifically, energy junk-rated debt have a current average yield of 8.8%, whereas the broader Barclays high yield bond index shows a 6.6%. Excluding energy sector debt, the average yield on junk bonds is 5.7%. In contrast, the widely viewed Barclays Aggregate Index has a 2% yield.
When examining default risks, Tracy Wright, a high-yield bond fund manager at Pioneer Investments, acknowledges that there will be defaults in more lowly-rated U.S. energy companies but also argues that many are cutting down investments and costs in an attempt to raise equity for any problems ahead. Additionally, the current problems in the energy sector are all supply related, which is easier to manage, while fundamental demand remains robust.
“We’re already pricing in a pretty negative outlook in the short and medium term,” Wright said in the FT article. “If you’re willing to be patient there’s still some value there.”