Exposure to the energy sector and the wilting credit quality of that group’s high-yield debt issuers has been a frequently discussed topic during oil’s current bear market. So has the impact of declining energy sector credit quality on junk bond exchange traded funds because some of the big-name high-yield bond ETFs feature notable energy sector allocations.
However, junk bond investors face growing risks as companies look to refinance debt with interest rates beginning to rise, reports Matt Turner for Business Insider.
“The key question is: will credit markets be able to absorb the refinancing needs of lower quality high yield and leveraged loan borrowers?” Matthew Mish and Stephen Caprio, strategists at UBS, asked in a note.
The UBS strategists argue that roughly 35% to 40% of outstanding U.S.high yield and leveraged loan debt, or roughly $1.05 trillion to $1.2 trillion in low quality speculative-grade debt outstanding “is at risk.”
Still, investors need to understand their junk bond ETFs’ energy risks and if the funds they own are really as vulnerable as some pundits make them out to be. The Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) is a good example of this scenario. ANGL tracks so-called fallen angel, speculative-grade debt, or those bonds that were born with investment-grade ratings but were later downgraded to junk territory.