Good Vibes for Junk Bond ETFs

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, and rival junk bond ETFs are likely to be heavily scrutinized this year as investors mull the possibility of multiple interest rate hikes from the Federal Reserve.

Due to junk bond’s more “equity-like” nature compared to Treasuries or investment-grade debt, high-yield bonds could strengthen on the higher growth environment in the U.S., especially with rebounding oil prices that would further diminish credit risk for energy-related speculative-grade debt, the largest sector that makes up about 15% of high-yield market.

While interest rates are rising, rates are still hovering near historical lows, which will help make it easier for companies to repay debt or reduce default risks. More quick-witted corporate treasurers have already locked into low, long-term loans, further mitigating default risks.

“Not only are defaults lower, but the earnings of junk-rated companies are higher, it reports, citing research from Bank of America Merrill Lynch. In fact, four out of six investment banks are positive on the sector currently, the Journal finds,” reports Amey Stone for Barron’s.