There are two primary risk elements involved with bond investing – rate risk and credit risk. Interest rate risk came into focus in the second quarter amid increased speculation about when the Federal Reserve could begin tapering its quantitative easing program.
The tapering-induced rate risk caused a flight out of longer duration bonds and bond funds into short duration fare. High-yield bond exchange traded funds, such as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) , were also adversely affected by the “taper tantrum,” but yield-hungry investors have returned to junk bond ETFs. [Junk Bond ETFs Loving a No Tapering World]
Not only have high-yield bond ETF investors been rewarded for their faith with robust yields, but capital appreciation has been seen in recent months. And perhaps most importantly as it applies to this asset class, default risk dropped last month.
“The default rate among junk-rated U.S. companies fell further to 2.4% in November from 2.5% in October, barely more than half its long-term historic average and down from 3.1% a year ago,” reports Michael Aneiro for Barron’s, citing Moody’s Investors Service.
As default rates declined last month, HYG and JNK gained an average of 0.7% while shorter-duration equivalents the PIMCO 0-5 Year High Yield Corporate Bond Index Exchange-Traded Fund (HYS) and the SPDR Barclays Short Term High Yield Bond ETF (SJNK) each added about 1%. [Junk Bond ETFs Skirt Duration Risk]
There was also good news for global junk bonds, which often sport lower default rates than their U.S. peers.
“Globally, the default rate fell to 2.7% in November from a revised 2.9% in October and 2.8% a year ago. In Europe, the rate fell to 3.1% from a revised 3.4% in October, but up a bit from 2.7% a year ago. Moody’s forecasts the global rate to finish 2013 at 2.8% before falling to 2.4% a year from now,” Barron’s reported.
The Market Vectors International High Yield Bond ETF (IHY) , an ETF that has remained sturdy in the face of a flood of new high-yield issuance in Europe, jumped 1.4% in November. Four of IHY’s top-six country holdings are European nations with the U.K., Germany and Italy combining for just over 30% of the ETF’s weight. Over 46% of the ETF’s 370 issues are denominated either in British pounds or euros. [New Issuance not Holding Back This High-Yield Bond ETF]
SPDR Barclays Short Term High Yield Bond ETF
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.