High-yield corporate exchange traded funds, including the two largest, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), have been ensnared in controversy lately. However, some market observers believe the high-yield bond market will not be the cause of another market crisis.
Junk bond ETFs have also experienced their fair share of liquidity concerns. Observers are concerned that after investors funneled billions into the asset in the low-yield environment, investors may face liquidity challenges when trimming their junk bond ETF exposure.
Last week, Third Avenue Management LLC blocked investors from redeeming positions from the $789 million Third Avenue Focused Credit Fund (TFCIX), warning investors that sellers may not receive all their money back for months, the Wall Street Journal reported. The fund provider contends that the poor bond-market trading conditions made it nearly impossible to raise the necessary cash to meet redemptions without resorting to a fire sale.
“As the drop in high-yield, or junk, bonds, claimed its biggest victim since the 2008 financial crisis, BlackRock‘s Peter Fisher said Monday he does not see the risky end of the corporate fixed income market sinking the overall U.S. economy like the bust in subprime mortgages did during the Great Recession,” reports CNBC.
Still, a rising number of defaults by energy sector issuers are troubling some junk bond market participants. “A 4.5% 2016 high yield default rate equates to $66 billion of defaults and would be the fourth highest default total since 2000. This would be close to the $78 billion amassed in 2001 but well below the record $119 billion posted in 2009,” said Fitch Ratings in a note posted by Amey Stone of Barron’s.
The popular high-yield ETFs include significant exposure to lower quality speculative-grade debt that are at greater risk to default. For instance, JNK has a 13.8% tilt toward CCC or lower-rated debt and HYG has 8.8% in CCC-rated securities. [Bond ETF Outflows Picking Up]
“Fisher on CNBC Monday took issue with the notion that junk bond ETFs are not liquid. “We had 4.5 billion almost in volume just in BlackRock’s HYG high yield … on Friday.” That compares, he continued, to the cash market, which “on a normal day does 6 to 9 billion” in volume,” according to CNBC.
iShares iBoxx $ High Yield Corporate Bond ETF
Tom Lydon’s clients own shares of HYG and JNK.