After the fallout in the fixed-income market following the sudden surge in yields, investors are moving back into speculative-grade, junk bond exchange traded funds.
Over the past week, as the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) rose 0.9% and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) gained 0.8%, investors funneled $1.2 billion in HYG and $796.7 million into JNK, according to XTF data.
Meanwhile, the iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) fell 0.5% as yields on benchmark 10-year Treasury bonds continued to pusher higher to 2.481% on Tuesday.
Despite the rising yields, junk bonds are strengthening, which suggest that the riskier segment of the fixed-income market is more closely following the strengthening equities market.
Bond investors may also be warming up to the junk bond market on diminished credit risk after oil prices surged in response to the Organization of Petroleum Exporting Countries and non-OPEC producers’ agreement to curb output in a bid to stabilize global prices. With oil prices rising, highly leveraged speculative-grade energy company debt are less likely to default.
HYG, which tries to reflect the performance of the Markit iBoxx USD Liquid High Yield Index, also includes a 14.1% tilt toward the energy sector.
Moreover, investors poured $413.8 million into the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), the largest senior loan-related ETF on the market, over the past week, which suggests that some are turning to the senior secured floating rate bank loan market to hedge against rate risks.
Senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates. Since rates are typically reset once per quarter, senior loans typically have low durations – a measure of a bond fund’s sensitivity to changes in interest rates. The floating-rate component also offer investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute to traditional corporate debt in a rising rate environment.
For more information on the speculative-grade debt market, visit our junk bonds category.