However, the current fixed-income market may be distorted due to years of quantitative easing, which has pushed down bond yields across the board.
Additionally, many speculative-grade energy and materials debt issuers are under pressure after crude oil and metals prices tanked over the past year. [The Many Faces of High-Yield Bond ETFs]
ETF investors can hedge against the rising credit risk through a credit default swaps-related ETF, the ProShares CDS North American HY Credit ETF (BATS: TYTE). A credit default swap is essentially insurance or protection against non-payment of a debt obligation. If interest rates spike, lowly-rated borrowers that issued high-yield bonds at today’s low rates could be forced to pay old debt with new debt issued at higher rates, a scenario that could increase the allure of CDS. Potential investors, though, should be aware that TYTE is still rather small with low average value, so people should utilize limit orders to better control trades.
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.