Investors Show Renewed Interest in High Yield Fixed Income | ETF Trends

Investors showed renewed interest in high yield fixed income for the week ended July 8, even as Treasuries sold off in the face of stronger than expected economic data.

While rising yields across the curve led to negative returns in high-quality credit, spreads in high yield rallied, according to the latest weekly credit update and commentary from BondBloxx Investment Management. Yields for high yield fixed income reached 8.4% as of July 8, well above those of investment grade corporate bonds (at 4.8%). This tightening in high yield spreads was led by the less credit-sensitive BB sector, leading to a 1.6% return for BBs.

“With equities showing off a bit a reprieve in early July and inflation expectations coming down sharply, folks were willing to dive in and take some risk in high yield,” said BondBloxx co-founder Elya Schwartzman.

Debt-heavy CCCs, meanwhile, lagged, returning 0.5% for the week. For the one-month period, BBs (-3.3%) lead CCCs (-6.4%) by more than three percentage points. Schwartzman noted that while investors were a bit adventurous with BBs, they weren’t as eager to dip their toes into CCCs.

“Economic growth expectations are still coming down and thus near-term risk of defaults in cash-strapped companies is rising,” Schwartzman said.

This rally in high yield fixed income spreads comes the same week the June jobs report revealed that payrolls have exceeded estimates and unemployment remains low, all but cementing another rate hike of 75 basis points from the Federal Reserve at the end of July.

With oil prices down from early June’s peak, energy was the laggard in high yield last week, returning 0.7%, as TMT led the high yield space, with a 1.7% return. Though still leading for 2022, energy is now the one-month laggard, down -5.1%, while consumer non-cyclicals lead at -2.9% for the month.

Launched in October of 2021 to provide precision ETF exposures for fixed income investors, BondBloxx Investment Management was founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Tony Kelly, Elya Schwartzman, Mark Miller, and Brian O’Donnell. The team has collectively built and launched over 350 ETFs at firms including BlackRock, JPMorgan, State Street, Northern Trust, and HSBC.

Last month, BondBloxx launched the BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF (XEMD), its 11th listing since February 2022, joining seven sector-specific high yield ETFs and three new ratings-specific ETFs listed in May. The company has also filed a prospectus for a series of eight duration-specific Treasuries ETFs.

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