High-yield corporate bond exchange traded funds, such as the iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (NYSEArca: JNK), struggled last year. However, early in 2019, those funds are rebounding and data suggest investors are embracing the rally.
Some market observers believe the junk bond rally could be short-lived and that the asset class could disappoint again this year.
“According to Bloomberg, high yield bonds limped into 2019 after suffering from a December selloff that was the worst month for the asset class since 2011,” said State Street in a recent note. “Most high yield experts chalked up the volatility to a liquidity driven event rather than a negative assessment of the asset class’ fundamentals. An index of high yield bonds declined about 2.6% in 2018.”
Although junk bonds struggled last year, many analysts were bullish on the asset class heading into 2019.
“Despite the losses, strategists have been ratcheting up their forecasts for high yield bonds in 2019. Perhaps they are emboldened because high yield bonds have only suffered an annual loss seven times in the last 35 years and they have never had negative returns in consecutive years. In fact, on average high yield bonds have surged 29% in the calendar year following a negative performance year,” according to State Street.
JNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays High Yield Very Liquid Index, which is designed to measure the performance of publicly issued U.S. dollar denominated high yield corporate bonds with above-average liquidity. HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality.