While fixed-income assets dipped in response to the rise in rates over the second quarter, high-yield bonds and related exchange traded funds have been able to weather the storm.
Speculative-grade bonds have staged a comeback in 2015 after suffering a huge blow in response to the oil price plunge and concerns to junk-rated shale companies last year, writes Morningstar strategist John Gabriel.
Supporting the gains in the high-yield bond space, the more attractive spreads are bringing back investors. In June 2014, before the oil-price swoon, the BofAML HY Master option-adjusted credit spread was 3.35%. The spread, though, rose to 5.08% ate the start of the year.
“High-yield credit spreads actually contracted over the first half of the year,” Gabriel said. “This spread compression helped drive the bank-loan and high-yield bond categories’ claim to the top two spots among all fixed-income categories at the midpoint of 2015, with category average returns of 2.5% and 2.4%, respectively.”
The actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) gained 2.7% year-to-date while the First Trust Senior Loan ETF (NasdaqGM: FTSL) increased 2.9%. Meanwhile, the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior bank loan-related ETF, was up 1.0%.
Senior bank loans are a type of debt financing obligation issued by a bank. The loan is considered senior to all other claims against the borrower, so it receives priority in the event of a bankruptcy. Additionally, since the senior loans have rates that adjust periodically, the floating-rate loans offer investors an alternative method of earning yields with little or no interest-rate risk, which may have also helped attract more investors during a period of increased interest rate uncertainty. [Rising Rates Bring Bank Loan ETFs Back Into The Spotlight]