Speculative-grade, high-yield bond exchange traded funds are finally feeling the pressure of the global bond sell-off, and investors are pulling out of junk ETFs in droves.
Junk bond ETFs remained relatively unchanged through late April and May while the Treasuries and investment-grade debt markets sold off. However, over the past week, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) declined 1.2% and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) fell 1.4%. Both JNK and HYG briefly tested their support at the 200-day simple moving average on Tuesday as well.
Additionally, while the speculative-grade debt market was selling off over the past week, investors pulled $571.7 million from JNK and redeemed $940.5 million from HYG.
The recent reversal in sentiment suggests that the Federal Reserve interest rate hike fears are finally taking hold among junk bond investors.
“Price action was miserable across risk assets yesterday,” Peter Tchir, head of macro credit strategy at Brean Capital LLC, said in a Bloomberg article. “It was the first time since yields shot higher that credit markets felt weak.”
The high-yield bonds market remained relatively stable through May. According to Bank of America Merrill Lynch, global junk notes gained 0.4%, whereas German government bonds led the world’s bond market don 0.5%.
Moreover, while global bonds dipped 0.6% in April, junk bonds returned 1.6%.
However, some market observers attributed the resilience in junk bonds to the rebound in oil prices, which helped support energy bonds that plunged in late 2014 in response to the falling crude oil prices.
Junk bonds also tend to have shorter maturities and a much higher yield over benchmarks than higher-rated bonds, which can help cushion investors from the negative effects of rising rates and higher inflation. For instance, JNK has a 4.38 year duration and a 5.61% 30-day SEC yield, and HYG shows a 4.13 year duration and a 5.14% 30-day SEC yield. [Hedged Bond ETFs to Diminish Rate Risk]
High-yield debt has “shown a degree of resiliency here to the shift in the inflation outlook,” Jeffrey Rosenberg, a managing director at BlackRock Inc., told Bloomberg. “That resilience could be challenged if we follow up this bout of higher rates with a shift in” expectations for when the Federal Reserve will lift rates.
iShares iBoxx $ High Yield Corporate Bond ETF
For more information on speculative-grade debt, 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.