Speculative-grade debt and junk bond-related exchange traded funds have been under pressure for most of 2015, potentially opening a bargain opportunity for fixed-income investors.
Jonathan Beinner, chief investment officer at Goldman Sachs Asset Management, believes that one of the year’s big surprises may be found in junk bonds, which could “actually have decent returns,” reports Matthew J. Belvedere for CNBC.
Investors dumped junk bonds last year in anticipation of a Federal Reserve rate hike and on an underpforming energy sector. For instance, over the past year, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) fell 8.5% and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) dropped 6.7%.
Beinner also anticipates high-yield default rate to climb to a range of 5% to 5.5% this year, compared to 3.2% in 2015.
“About two-thirds of that is expected to come from the energy sector,” Beinner told CNBC. “There’s clearly lots of risk in that sector. But there’s 85 percent of the high-yield market that isn’t exposed to commodities, and is actually priced around an 8 percent yield.”
For instance, HYG includes a 10.3% tilt toward energy, which has been dragged down by falling crude oil prices. With crude oil prices near 11-year lows, many anticipate greater defaults among more leveraged energy companies. HYG also comes with a 8.04% 30-day SEC yield.
On the other hand, Beinner expects default rates outside energy to hold at around 2% this year.
Some money managers, though, have a more favorable view on the high-yield energy segment after the blood letting in 2015.
“Valuations within the high-yield asset class cheapened significantly in 2015 and, in particular, within the E&P industry,” Western Asset said in a Legg Mason note. “While we acknowledge that some companies will not be able to sustain low energy prices into 2016, we believe defaults will be less than half of what valuations imply.”
iShares iBoxx $ High Yield Corporate Bond ETF
Max Chen contributed to this article.