High Yield Outperforms Investment-Grade Credit | ETF Trends

High yield credit outperformed investment-grade credit for the week ending May 6 at a time when markets saw significant volatility, according to BondBloxx Investment Management co-founder and CIO Elya Schwartzman in a weekly update on the U.S. credit markets. Cash high yield credit markets posted a return of -1.2% last week as spreads widened more than 25 basis points. In fact, cash high yield credit markets were initially muted as investors sold off stocks amidst inflation fears.

While stocks recorded their biggest one-day decline in two years, dropping nearly 4% on May 5, Markit’s North American High Yield CDX Index widened more than 30 basis points to 460, a level not seen since July 2020.

In line with market sentiment, riskier CCC bonds returned -2% while BBs returned -1%.

While most high yield sectors posted returns of around -1%, healthcare returned -2%. Investment-grade and emerging markets spreads were stable, up one and six basis points, respectively, with the -1.5% return being driven nearly entirely by rates. Index declines for the week were less drastic in shorter-dated credit, such as 1-10yr EMD, which returned -0.9% vs. -2.4% for long-duration EM.

Returns as of May 6, 2022
Source: Ice Data Services; JP Morgan; IHS Markit, Bloomberg, TRACE, BondBloxx.

In February, BondBloxx launched seven U.S. high-yield bond ETFs that offer precise, index-based exposure to the high yield asset class and allow investors the opportunity to diversify and manage risk to the industry sector. The funds are passively managed and track rules-based sub-indexes of the ICE BofA US Cash Pay High Yield Constrained Index.

BondBloxx was founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Elya Schwartzman, Mark Miller, Brian O’Donnell, and Tony Kelly. The team has collectively built and launched over 350 ETFs at firms including BlackRock, JPMorgan, State Street, Northern Trust, and HSBC.

According to the issuer, more institutional investors are acknowledging the role that fixed income ETFs can play in their portfolios, even during times of volatility. They can offer short-term liquidity alongside a more efficient way to keep portfolios in balance. Sector ETFs enable intentional tactical tilts to be added to their portfolios. They can also enhance price discovery, even when transparency is low or the underlying securities are not trading.

“One of our goals at BondBloxx is to provide market awareness of the variation of returns within the credit markets,” said Schwartzman. “An important yet unappreciated source of outperformance for investors is the dispersion of returns within the broader bond market categories, especially during times of market dislocation.”

For more news, information, and strategy, visit the Institutional Income Strategies Channel.