Federal Reserve Chair Jerome Powell had the capital markets feeling joyful and triumphant after delivering a speech at the Economic Club of New York on Wednesday where he sounded more dovish on the central bank’s inclination to hike rates further. Did Powell flip the switch back to risk-on for investors?
The general consensus in the markets seemed to think so as the Dow Jones Industrial Average gained 600 points, which may have also reignited an interest back into high-yield debt issues as investors may be interpreting Powell’s comments that the extended bull run prior to October’s sell-offs still has legs.
To satiate the appetite for high yield, investors can look to fixed-income exchange-traded funds (ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), ProShares High Yield—Interest Rate Hedged (BATS: HYHG) and WisdomTree Interest Rate Hedged High Yield Bond ETF (NasdaqGM: HYZD).
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. HYHG tracks the performance of the Citi High Yield Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates HYZD seeks to track the price and yield performance of the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Zero Duration Index, which provides long exposure to the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index while seeking to manage interest rate risk through the use of short positions in U.S. Treasury securities.
The general consensus is that a rate hike in December will most certainly occur as the CME Group’s FedWatch Tool, an algorithm that calculates the probability of a rate hike in a given month, is now showing an 82.7% chance the Fed will institute a fourth rate hike to end 2018. With rates rising and investment firms like Goldman Sachs joining JP Morgan in singing the chorus of more rate hikes to come in 2019, the demand for high-yield could heighten.