Investors Warm to Junk Bond ETFs as Default Rates Stay Low

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds, as well as rival junk bond funds remain compelling destinations for yield-starved investors, particularly with high-yield default rates remaining low.

With the Federal Reserve standing pat on interest rates and remaining vague on its bond tapering plans, yields on U.S. Treasuries dipped in the latter half of July, which helped fuel greater demand for alternative income-generating assets in a persistently low-yield environment. The additional risk-on sentiment toward corporate America in light of the rosy second quarter earnings season also helped lift the outlook on credit markets.

Last month, HYG and JNK added over $2.1 billion, combined, in new assets.

“The U.S. trailing 12-month (TTM) high yield default rate dipped below 2% for the first time since March 2014,” said Fitch Ratings. “July’s 1.9% default rate is down from 4.7% at the end of last year. Fitch expects the August TTM default rate to stay below 2%. It would require roughly $2 billion in defaults this month to drive the rate above 2%. Nevertheless, Fitch anticipates the default rate to finish 2017 near 3%.”