The May peak to June trough decline for the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) , the largest high yield bond ETF by assets, was 7.5%. That decline was induced primarily by speculation the Federal Reserve was preparing to taper its quantitative easing program.
Fast forward a few months and it is widely believe the Fed will not taper until the end of the first quarter of 2014 at the earliest. Even that scenario may not be as likely as some would like to believe. Janet Yellen, presumably the next Fed chair, is a noted dove and if confirmed, she would take over for Ben Bernanke in early 2014. Why would she want to taper just six or seven weeks after becoming Fed chair? [High Yield Bond ETFs and Rising Interest Rates]
In the here and now, junk bond ETFs are rallying. For example, HYG has taken back nearly all of its May-June losses.
“Junk bond mutual funds and ETF’s started reflecting weakness back in May, about the time the S&P 500 was starting to struggle a little bit. The decline in the junk market saw each of these funds cross below their 200SMA lines, often times a signal of market softness or lack of stock market progress could be at hand,” said technical analyst Chris Kimble.
HYG and the SPDR Barclays Capital High Yield Bond ETF (JNK) , the second-largest high yield bond ETF, crossed back above their 50- and 200-day moving averages last month. Both ETFs now reside 2.8% above their 200-day lines. Since the start of September, HYG, JNK and the PowerShares Fundamental High Yield Corporate Bond ETF (PHB) are up 4% apiece. [Bond ETFs Breaking Out]
HYG is now just pennies below its 52-week high and a move above $94 could signify a new breakout and some see more upside for junk bonds.
“Longer term, high yield appears well positioned to outperform most other fixed income assets. With investors more concerned about interest rate risk than credit risk, high yield spreads offer more-than-adequate compensation for likely credit losses and the ability to absorb at least a portion of any further rise in interest rates,” said ING Investments in a note posted by Barron’s.
High yield bond issuance is about $275 billion this year, but October issuance is likely to fall well short of the $47.6 billion seen last month.
PowerShares Fundamental High Yield Corporate Bond Portfolio
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of HYG and JNK.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.