The 2018 Midterm Election results didn’t throw a curveball at investors as most expected a divided Congress would be the result, but a move into high-yield also came as the rally in the capital markets ensued.
A combination of rising interest rates, a healthy injection of government debt into the markets and other external factors has made for a more intricate bond market. The sell-offs in October was partly to blame as a confluence of these factors, which could signal that the environment for fixed-income investors will only get more complex.
“New cross-currents created by historic injections of central bank liquidity – as well as by demographics, technology, and regulation – have made it more complex,” an article in Institutional Investor noted. “A transition is under way as monetary policy normalizes, liquidity ebbs, and bouts of volatility are roiling the market. The implications for fixed income investors are significant.”
Related: Yields Tick Higher in Anticipation of Fed Likely Keeping Rates Unchanged
High-Yields in Favor Post-Midterm Elections
Post-midterm election bond activity saw investors clamoring for high yield bond ETFs as the capital market rally ensued. Some options to consider for high yield include the SPDR Bloomberg Barclays ST HY Bd ETF (NYSEArca: SJNK), iShares 0-5 Year High Yield Corp Bond ETF (NYSEArca: SHYG) and iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG).
“Fixed income was active yesterday with the highlight in high yield–we saw a large rotation (~$700M) into High Yield names with large block buyers,” wrote Brian Gilman of Virtu Financial in an email.
SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade.
SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index, which is primarily composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. Like SJNK, debt maturities are shorter, thereby helping to hedge some credit risk, but issues are still less than investment-grade.
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.
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