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, have been benefiting from low interest rates and the rebounding energy and materials sectors.
Although high-yield bonds were decked by comments last week by a member of the Federal Reserve that central bank should not wait too long before boosting rates, the technical setups for these ETFs remain compelling and the interest rate outlook is essentially one rate hike this year at the most, bolstering the case for some higher-yielding assets.
SEE MORE: Junk Bond ETFs Shake-Off Year of Uncertainty
Still, some fixed-income traders are growing concerned that the steadily rising prices and lower spreads could diminish the speculative-grade debt market’s ability to generate overall positive returns even as rising interest rates cut down the value on bonds.
Earlier this year when the markets were gripped by uncertainty over a possible U.S. recession, junk bond yields surged to over 10% and the spread to Treasuries expanded to 9 percentage points, which reflected the growing premium on speculative-grade debt and investors’ willingness to ride out volatile periods with higher yields to cushion against potential defaults.
[related_stories]“Once junk bonds started turning weak in 2014, stocks struggled to move much higher,” according to Kimble Charting Solutions. “Once Junk bonds hit support and turned higher in February of this year, stocks did the same. Currently JNK is testing a couple of breakout levels.”