Global central bank policies have pressured yields across the globe, pushing more investors into speculative-grade debt and junk bond exchange traded funds in search of higher yields.
So far this year, global junk bonds have attracted $9 billion in net inflows, Bloomberg reports. EPFR Global data reveals that flows into junk bond ETFs over the first fourth months of the year exceeded any comparable period since the firm began collecting data in 2007.
Over the fist four months, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) saw $1.7 billion in net inflows and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) add $1.8 billion, according to ETF.com.
JNK offers a 5.53% 30-day SEC yield and HYG has a 5.04% 30-day SEC yield.
Even the most conservative investors are feeling the pressure from central bank actions and the new low-yield environment. For instance, in Europe where yields have been pushed into the negative territory, the Zurich Insurance Group and Assicurazionl Generali SpA, the largest Swiss and Italian insurers, are switching into sub-investment grade debt for the first time, according to Bloomberg.
“I’m long high yields right now,” Jeffrey Gundlach, the founder of DoubleLine Capital, said on Bloomberg.. “They’ve done quite well lately.”
Year-to-date, JNK was 3.9% higher and HYG was up 3.1%. In contrast, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) rose 0.4% so far this year while iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) gained 1.2%. [Energy Rebound Lifts Junk Bond ETFs]
High-yield bonds represent “some of the best strategies to generate total return in today’s low-return environment,” Payson Swaffield, chief investment officer for fixed income at Eaton Vance Investment Managers, said in the article.
Nevertheless, the Federal Reserve’s eventual interest rate hike could pressure U.S. junk bond ETFs down the line. Additionally, a record 84% of professional investors surveyed by Bank of America in April said bonds were overvalued after years of quantitative easing and low interest rates.
SPDR Barclays High Yield Bond ETF
For more information on speculative-grade debt, visit our junk bonds category.
Tom Lydon’s clients own shares of HYL and JNK.