Is the Fed’s Move to Bail Out High Yield All for Naught?

For investors looking to get exposure to high yield via exchange-traded funds (ETFs), Goldman Sachs is warning that the Federal Reserve’s move to backstop junk debt may not be as reinforced as one might think. Amid the coronavirus pandemic, the Fed opted to purchase riskier debt, including high yield bonds to help prop up the fixed income markets, but it could be all for naught.

After a hellacious March sell-off, the Fed agreed to purchase junk-rated bonds via ETFs. This, in turn, caused an influx of capital into high yield funds—a move that not only could benefit short-term holders looking to gain on a bump up in bond prices but also to fixed income investors looking for yield.

“With 10-year US Treasuries yielding a miserly 0.6% as of April 28, income-starved investors such as pensioners, retirees, and savers don’t have many low-risk options to generate much-needed income in their portfolios,” said State Street Global Advisors’ Michael Arone.

The underlying risk, however, is if the economy goes deep into a recession, Goldman Sachs is forecasting a wave of credit defaults—the riskiest debt being the first to go in a long line of dominoes. For now, it appears the Fed’s move could provide the necessary support, but for how long?

“Formally risky bonds suddenly appear to be less risky,” Arone said. “Strangely, this is occurring while the economy is entering a recession, corporate profits are plummeting and job losses are skyrocketing. The disconnect between the underlying fundamentals of bond issuers and bond prices is tough to reconcile.”

High Yield Bond ETF Options

Investors looking to add high yield bond exposure to their ETF portfolios can look at the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK). Some market experts question whether this move is nothing more than a small bandage on a gunshot wound.

Investors contemplating a high yield option can take a look at the Goldman Sachs Access High Yield Corporate Bond ETF (GHYB). GHYB seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the FTSE Goldman Sachs High Yield Corporate Bond Index.

The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index is a rules-based index that is designed to measure the performance of high yield corporate bonds denominated in U.S. dollars that meet certain liquidity and fundamental screening criteria.

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