Rising Corporate Defaults Could Keep a Lid on Junk Bond ETFs

Riskier speculative-grade debt and bond-related exchange traded funds have retreated over the past year and are trading at relatively attractive valuations. However, rising corporate default rates could bar the asset category from a full recovery.

Junk bonds have rebounded alongside the equities market from the February lows. Year-to-date, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) rose 1.7% and iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) gained 2.2%.

The speculative-grade debt market, though, may have a hard time regaining lost ground ahead as credit risk comes back to the forefront. According to ratings agency Standard & Poor’s, more companies have defaulted globally so far this year than during the start of any year since 2009, reports Josie Cox for the Wall Street Journal.

The S&P’s findings mirror Moody’s expectations that corporate defaults could hit its highest rate since the financial crisis, led by the energy and mining sectors.

“In the past six years, the global economy has enjoyed a benign default environment as accommodative monetary policies have fueled the corporate debt market with abundant liquidity, allowing many low-rated issuers to refinance when needed,” according to a Moody’s report. “The party is likely coming to an end soon as the global default rate is expected to approach the historical average mark by the end of 2016.”