U.S. speculative-grade debt and junk bond-related exchange traded funds have been outperforming in the fixed income space in December.
In the past month, the iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) both gained 2.8%, whereas the U.S. Aggregate Bond Index was more or less unchanged.
High-yield debt has gained about 2% in December, the biggest monthly return in over a year after the fixed income category suffered one of its worst months since the start of the pandemic, Bloomberg reports.
Meanwhile, speculative-grade bond yields have rallied by over 40 basis points in the past week or so alone and are on pace to dip below 4% if junk bonds continue to advance. Bond prices and yields have an inverse relationship, so the recent rally has sent yields lower.
Contributing to the strength in junk bonds, a slow-down in new bond issues has been a major contributing factor, along with increased inflows to the fund category that further supported the debt.
Nichole Hammond, senior portfolio manager at Angel Oak Capital Advisors LLC, notes that there hasn’t been a new issue since mid-December, so the limited supply is forcing investors who are looking to add risk to turn to bonds circulating in the secondary market.
Beyond “favorable technical trends,” concerns about the Omicron variant have also eased, Hammond adds. “Recent headlines regarding the virus variant and risk of associated lockdowns have been less severe than initially feared and led spreads to recover the widening in November,” Hammond says in a statement.
Looking ahead, as we head into the new year and the market prepares to reopen, Hammond believes that “we are back to where we were entering November,” with a favorable backdrop in 2022 for high-yield bonds that provide attractive valuations and lower duration compared to other risk assets.
“Current spreads already incorporate a large amount of positive news and we do expect pockets of volatility given how compressed spreads are,” Hammond adds. “It’s difficult to see high-yield spreads move materially wider or tighter unless a specific catalyst emerges.”
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