After fixed-income assets dipped in response to the recent rise in rates, high-yield speculative-grade debt and related exchange traded funds could outperform ahead.
“We continue to expect that high-yield bonds will provide better returns than investment-grade as underlying rates tick up and moderate economic growth holds down defaults,” according to Morningstar Corporate bond strategist, David Sekera.
While the fixed-income universe retreated over last month, high-yield bonds continued to shine. The BofA Merrill Lynch US High Yield Index rose 1.2% in April and has gained 3.8% year-to-date.
Looking at ETF options, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) only added 0.2% so far this year, whereas the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) rose 2.6% and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) gained 3.5%. [Investors Returning to Corporate High-Yield Bond ETFs]
Sekera argued that the gains in the high-yield segment were attributed to the tightening credit spreads as the average credit spread of junk bonds tightened over Treasuries, with a major portion of the tightening coming out of the energy sector as oil prices rebounded this year.