ETF Investors Grow Wary of Junk Bond Rally

As junk bonds rallied, the risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 junk-rated firms, rose to its highest level in a bout a month. The gauge reflects the perception of creditworthiness and rises in response to growing credit concerns.

On the other hand, some observers believe the wide yield spreads between junk bonds and government debt reflect attractive valuations in the speculative-grade debt market – yields on speculative-grade debt were 639 basis points over comparable government bonds Thursday, Bloomberg reports.

Related: Junk Bond ETFs Are Moving in Step with Oil

“We think spreads are wide,” Collins, co-manager of the Prudential Short Duration High Yield Income Fund, told Bloomberg. “There’s definitely scope for them to fall, especially if you think some of the defaults that everybody’s been waiting for maybe are already happening.”

HYG, which has a 4.02 year duration, has a 6.58% 30-day SEC yield. JNK, which has a 4.38 year duration, has a 6.85% 30-day SEC yield. In contrast, 5-year Treasury bonds yield 1.20%.

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