While the Federal Reserve eyes interest rate cuts to prop up the economy, fixed-income investors are looking into speculative-grade, junk bond ETFs for the lower-for-longer yield environment.
Among the most popular ETF plays of the past week, the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) brought in a little under $1.1 billion in net inflows while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) attracted $390 million, according to ETFdb data.
More fixed-income investors are looking back into attractive yield-generating assets, like high-yield corporate bonds, in light of the shifting rate outlook.
On Wednesday, the Federal Reserve is scheduled to meet and discuss its monetary policy where it is almost all but certain that Fed officials will cut interest rates for the first time in a decade. The Fed funds futures market reflects options traders’ bet of a 73% probability for a quarter point cut and a 27% chance of a more aggressive half point move.
“I would guess some members of the FOMC feel like they’ve been painted into a corner here because of the very aggressive pricing in the market,” Ethan Harris, head of global economics research at Bank of America Merrill Lynch, told CNBC.
The Fed has hinted at interest rate cuts to counteract growth concerns as a prolonged trade spate between the U.S. and China has weighed on the economy. Furthermore, recent data has revealed inflation falling short the central bank’s 2% target, providing additional room for policy makers to cut rates to support growth.
In this type of environment where we face lower rates for longer, investors are turning to junk bond ETFs for their attractive yield generation. Specifically, HYG shows a 5.08% 30-day SEC yield and JNK comes with a 5.46% 30-day SEC yield. Meanwhile, yields on benchmark 10-year Treasury notes were hovering around 2.06% and even briefly dipped below 2% earlier this month for the first time since 2016.
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