Are Overinflated Valuations Forming in Junk Bonds? | ETF Trends

Former U.S. Federal Reserve chairman Alan Greenspan made “irrational exuberance” a notable phrase ahead of the financial crisis in 2008, and now the word “exuberance” appears to be applicable to junk bonds.

This is according to a European Central Bank (ECB) report that lumps in junk bonds with other assets seen as possibly over-inflating when it comes to valuations. The other two here the housing market and cryptocurrencies.

Getting junk bond exposure can certainly be attributed to the current low-yield environment despite inflation starting to heat up globally. Rates are still low by historical standards, and the safe confines of government debt simply won’t cut it when it comes to extracting maximum yields in fixed income.

Additionally, the housing market has seen values rocket higher amid the social distancing measures and work-from-home orders at the height of the pandemic. In addition, a rise in digital payments like cryptocurrencies has been spawning greater demand in the digital currency space for utility and speculation.

“According to the report, investors continue to seek investment avenues that promise significantly higher yields on the back of declining interest rates and rising inflation,” Yahoo Finance reports.

“This trend, the bank argued, has led to surging investment activity in market segments like crypto, junk bonds, and housing,” Yahoo Finance adds. “The ECB stated that such a situation could cause problems down the line especially if abrupt changes to global liquidity conditions were to occur.”

A World Bond Focused on Credit Quality

Investors who want to extract more yield but don’t want the added risk of taking on less than investment-grade debt can look to bond-focused exchange traded funds that provide international exposure — enter the Vanguard Total World Bond ETF (BNDW). BNDW seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index, which measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds.

BNDW is ideal for investors who want exposure to debt markets outside the U.S. but do not want to completely disregard fixed income in the United States. In essence, the ETF provides more of a global aggregate bond fund.

BNDW offers:

    • Exposure to the Bloomberg Global Aggregate Float Adjusted Composite Index.
    • Broad, diversified exposure to the global investment-grade bond market.
    • Unique ETF of ETFs structure.
    • Intermediate-duration portfolio, with exposure to short-, intermediate-, and long-term maturities.
    • Current income with high credit quality.

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Fixed Income Channel.