With oil prices sliding back down, junk bond exchange traded funds could also experience another round of selling on increased default concerns over speculative-grade energy bond issuers.
Looking at junk bond ETFs, investors are exposed to some risk from speculative-grade energy companies. For instance, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) includes a 13.7% tilt toward the energy sector and the PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB) holds a 14.9% energy sector weight.
High-yield bonds declined last year on fears that the highly leveraged shale industry could default on debt obligations after oil prices plunged. Standard & Poor’s rating agency has already revealed that of the 59 global defaults so far this year, almost half were from the Energy and Natural Resource sector, Financial Times reports.
Moody’s ratings agency has calculated a 5.75% 12-month trailing default rate for metals, mining and oil and gas sectors in May, compared to the 3.34% default rate at the start of the year.
Analysts have already warned that pressure on junk-rated energy debt issuers will only rise as oil prices fall since rising default rates makes it harder for companies to secure further financing or roll over maturing obligations.
“The [junk]market rallied on the back of stabilising oil prices,” Raman Srivastava, managing director for global fixed income at Standish, said in the FT article. “If oil prices stay at these levels or fall further, then we’re going to see companies default . . . Some companies can cut costs and adjust, but not all can.”
Oil prices have come under pressure, with oil-related ETFs recently sliding back into bear market territory. A number of factors have been contributing to the lower oil prices, including rising from the U.S. and Organization of Petroleum Exporting Countries, potential increase in exports from Iran, a stronger U.S. dollar, weakening China outlook and lower institutional interest. [Oil ETFs Slide Back Into Bear Market]
West Texas Intermediate crude oil futures traded at about $51.9 per barrel while Brent crude oil futures hovered around $57.3 per barrel.
iShares iBoxx $ High Yield Corporate Bond ETF
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.