The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) have already been identified as vulnerable to declining oil prices as many high-yield managers believe the energy sector can survive with oil prices north of $75 but there may be increased defaults if oil remains below $60 per barrel.
Energy sector makes up about 13% of the Bank of America Merrill Lynch High Yield Master II Index. The junk bond ETFs also include significant exposure to the energy sector – for example, HYG has a 12.7% weight toward energy sector debt.
The Royal Bank of Scotland projects that U.S. default rates could double from about 2% to 4% by the end of the year. UBS has warned that distress in energy bonds can spread to other areas of the high-yield market as soem companies are exposed to the resulting investment decline and job losses.
While some market observers see value in high-yield bond ETFs, risks remain as junk bonds could see a sell-off during a rising rate environment after years of low interest rates pushed more investors into speculative-grade debt in search of yield. [3 Reasons to Consider Short Duration High Yield]
“Moody’s Liquidity Stress Index rose to 5.1% in August from 4.3% in July, placing it at its highest level since December 2010, the rating agency said in a statement. The index measures the number of companies that carry Moody’s lowest liquidity rating of SGL-4. The index rises when more issuers are placed in that category, and it falls when liquidity improves,” reports Ciara Linnane for MarketWatch.