Speculative-grade, junk bond exchange traded funds are beginning to slip as plunging oil prices renew default concerns for highly leveraged, high cost crude oil producers.
Over the past week, 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, both fell almost 1% as West Texas Intermediate crude oil futures dipped back into a bear market.
“Earlier optimism regarding the long anticipated rebalancing of the market has been tempered by persistently high inventories and renewed worries about the pace of demand growth against a backdrop of lowered global growth forecasts,” David Joy, chief market strategist at Ameriprise, told the Financial Times.
SEE MORE: Monitoring Junk Bond ETF Technicals
While high-yield bonds have recovered for much of this year after yield-hungry investors eased back into riskier areas of the debt market in response to aggressive stimulus measures from global central banks, analysts remain concerned that weakness in the oil market could trigger failures in the energy industry.
[related_stories]Energy company debt defaults have driven S&P’s trailing US junk bond default rate to a six-year high of 4.5% in July. Standard & Poor’s rating agency also projects the rate will rise to 5.3% by March 2017. Energy and natural resource companies made up over half of the 105 companies that defaulted globally this year.
The junk bond ETFs also include some significant exposure to the energy sector. For instance, HYG includes a 12.8% tilt toward energy producers.
However, yield-starved investors who are still interested in the junk bond space but are wary of further credit risks among energy producers may consider a recently launched ex-energy, high-yield bond ETF, the iShares iBoxx $ High Yield ex Oil & Gas Corporate Bond ETF (NasdaqGM: HYXE). HYXE basically tracks the same group of debt securities as HYG except it does not hold exposure to energy companies.
Related: July ETF Flows Show Investors Turned Risk-On
The ex-energy exposure may have also helped HYXE outperform HYG. Over the past month, HYXE gained 1.3% while HYG rose 0.6%. Over the past week, HYXE only dipped 0.4%, compared to the 1.0% pullback in HYG.
For more information on the speculative-grade debt market, visit our junk bonds category.