As equities markets bounce back and oil prices edge higher from a 13-year low, the rising risk-on sentiment has brought fixed-income investors back to the high-yield bond exchange traded funds.
Over the past week, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) attracted $340.2 million in net inflows, iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) added $945.4 million and iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) saw $387.5 million in inflows, according to ETF.com.
After underperforming government bonds during the risk-off environment, corporate debt is finally starting to outpace Treasuries. Over the past week, HYG rose 1.1%, JNK gained 1.3% and LQD increased 1.3%, whereas the iShares 3-7 Year Treasury Bond ETF (NYSEArca: IEI) was up 0.2%.
Investors may have been attracted to the cheap valuations and wider yield premiums that more speculative-grade debt offers over safe-haven government bonds after benchmark yields on 10-year Treasuries dipped toward all-time lows.
The BofA Merrill Lynch US High Yield Index shows a 8.17% yield, whereas 10-year Treasury notes have a 1.711% yield. Looking at the ETF options, JNK has a 4.29 year duration and a 8.06% 30-day SEC yield. HYG has a 4.0 year duration and a 9.01% 30-day SEC yield. IEI has a 4.0 year duration and a 1.06% 30-day SEC yield.
While high-yield speculative-grade debt offer attractive income opportunities, the asset category is not without its risks. U.S. energy companies, notably the nascent shale oil industry, has fueled junk debt, but the depressed crude oil prices has increased default risks. Fixed-income investors are demanding a yield of 19.6% to hold U.S. junk-rated energy bonds after borrowing costs crossed 20% for the first time ever this month, Bloomberg reports.
“From a fundamental standpoint the market’s in a wait and see mode and to a large extent remains at the mercy of oil,” Adam Sarhan, CEO of Sarhan Capital, told CNBC. “As goes oil, so goes the other risk assets.”
iShares iBoxx $ High Yield Corporate Bond ETF
Max Chen contributed to this article.