The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds by assets, and rival junk bond ETFs are rebounding this year as investors remain thirsty for yield.
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.[related_stories]
Last year, high-yield corporate bond exchange traded funds were controversial ideas. With oil prices tumbling and the Federal Reserve appearing as though it was on course for multiple interest rate hikes in 2016, ETFs such as HYG and JNK were punished by investors.
That situation has reversed in significant fashion this year. Rebounding oil prices and diminishing chances of multiple interest rate hikes are encouraging investors to revisit junk bond ETFs, including HYG and JNK. HYG and JNK are the two largest high-yield corporate bond ETFs by assets.
Regarding JNK “it finds itself at an important juncture, as the current rally meets resistance. I believe that what the ETF does over the next two weeks may be a strong indicator of what’s to come in the broader stock market,” according to Chris Kimble of Kimble Charting Solutions.
With diminishing chances of the Federal Reserve boosting interest rates this year and demand for yield still strong, investors have not been shy about flocking to JNK and other junk bond funds.
Futures traders have cut the likelihood of a hike in U.S. rates by year-end to around 10% since the Brexit, down from 50% on the day of the vote. Some traders are even assigning a 10% probability of a Fed interest rate cut at its July meeting and more than a 20% chance of a rate cut at subsequent meetings later this year and in early 2017, reports Jen Wieczner for Fortune.
“Junk bonds finally hit falling channel support in February, right around the time that stocks bottomed. The bounce higher signaled a risk-on trade that would prove stronger than many thought. Now JNK is testing a confluence of resistance,” adds Kimble.
SPDR Barclays High Yield Bond ETF