Speculative-grade, junk bond exchange traded funds are seeing greater interest from foreign investors targeting high-yield U.S. corporate debt as international yields spiral lower.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) both gained 2.8% over the past month, and the funds have increased over 7% year-to-date.
According to EPFR data, funds that invest in high-yield U.S. corporate bonds have attracted $1.5 billion in inflows for the week ended June 8, the highest level since early March, the Financial Times Reports.
The emergence of negative bond yields across much of continental Europe and Japan has triggered a global migration of investors into the U.S. market where yields are more attractive. For instance, yields on benchmark 10-year Germany bunds were at 0.02% and yields on 10-year Japanese Government Bonds hovered around -0.17%, whereas 10-year Treasuries showed a 1.64% yield. Meanwhile, yields have dipped to 5.04% for speculative-grade BB-rated U.S. companies.
“It all starts with the risk-free rate,” Jack Flaherty, the investment director of asset manager GAM, told the Financial Times. “You have $10tn of bonds that have now gone to zero or less … It forces people into longer duration and down in credit quality to get the yield they want.”[related_stories]
In an attempt to generate move attractive payouts in a low-yield environment, investors have been dipping into lower-rated debt securities – high-yield U.S. bond sales have topped $12 billion this week, the highest weekly level in seven months.
Looking ahead, bond watchers anticipate the European Central Bank’s expanded bond purchasing program will continue to lift U.S. company bond prices and depress yields further.
“There is a feeding frenzy in the primary market for high yield and investment grade [debt],” Jim Sarni, managing principal at Payden & Rygel, told the Financial Times. “The [ECB’s corporate bond buying] is exacerbating the feeding frenzy. You have a mega investor in the game now … It means more crowding out. Central banks are systematically crowding out investors.”
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iShares iBoxx $ High Yield Corporate Bond ETF