While expectations have diminished that the Federal Reserve will be able to raise interest rates four times this year, the forecast when 2016 started, meeting minutes out earlier this week revealed that the central bank could initiate its first rate hike of the year in June.
Higher rates could stymie high-yield corporate bond exchange traded funds, which have regained favor among income investors this year.
Related: High Quality Junk Bond ETFs Limit Default Risk
Speculative-grade, junk bonds have rallied off the February lows as some saw default risks, notably those associated with the energy sector, dissipate in light of rising crude oil prices. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest junk bond ETFs, are higher year-to-date.
The SPDR Barclays Short Term High Yield Bond ETF (NYSEArca: SJNK) is an alternative to consider if rates rise because SJNK offers income investors a lower duration avenue to high-yield corporates without a significant sacrifice in terms of yield.
[related_stories]“It might be slightly surprising to see that the Short Term High Yield Bond ETF has a greater percentage of its assets invested in securities with coupons of 6% or greater (56.3% vs. 47.5%), the fund’s focus on much shorter maturities tempers the portfolio’s overall risk significantly,” according to a Seeking Alpha analysis of SJNK.
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.
Related: ETF Investors Grow Wary of Junk Bond Rally
Even before news of a possible June rate hike became a point of emphasis high-yield debt defaults were rising. Oil, gas and mining companies make up the majority of defaults this year as commodity prices weakened over the past year. Diane Vazza, S&P’s head of fixed income research, found that 14 of the 40 defaults have come out of the oil and gas sector this year and eight from the metals, mining and steel sector.
SJNK’s “risk levels of the Short Term High Yield Bond ETF are lower using every measure. Modified adjusted duration is 45% lower. Beta is 44% lower. 3-year standard deviation of returns is 25% lower. While none of these is a perfect measure in and of itself, it shows that one fund is clearly less risky than the other,” adds Seeking Alpha.
For more information on the Junk Bonds sector, visit our Junk Bonds category.
SPDR Barclays Short Term High Yield Bond ETF
