The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds, along with rival junk bonds face familiar problem and that could explain the recently disappointing performances turned in by these funds.

Slumping oil prices remain an issue for junk bond funds. Industry experts warn that more oil-and-gas companies are poised to follow the recent Samson Resources Corp. bankruptcy filing as oil prices remain low after the steep drop off that began last year, the Wall Street Journal reports.

According to Fitch Ratings, the default rate among U.S. energy companies has accelerated to 4.8%, its highest level since 1999, up from 3.3% in August. Additionally, exploration and production companies are defaulting at an even higher rate of 8.5%, with default volume at its highest level in five years. In contrast, the broader U.S. corporate default is still a relatively low 2.9%. [Energy Sector Pressures Junk Bond ETFs]

Many below-investment-grade oil companies have been able to stay afloat during the oil price falloff as investors continued to provide funding. However, lenders are beginning to shy away from the energy sector. U.S. banking regulators also recently told banks that a large number of loans to energy producers are substandard, a move that could force lenders to turn down further loans to energy players.

“Five energy companies either completed distressed debt exchanges (DDEs) or missed a payment in October while five defaults have been recorded so far this month,” said Fitch Ratings in a note posted by Amey Stone of Barron’s. “The energy trailing 12-month (TTM) default rate finished October at 5.3%, the highest point since a 9.7% peak in 1999, while the exploration and production subgroup TTM rate hit 9.0%. The metals/mining sector TTM rate stands at 9.5% while the coal subsector jumped to 27.0%.”

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.