Investors’ infatuation will yield and optimism over the U.S. fiscal cliff deal has pushed the largest junk bond ETFs to their highest prices since the global credit crunch.
For example, iShares iBoxx High Yield Corporate Bond (HYG) during Wednesday’s rally touched a high of $94.23 a share. The breakout pushed the junk debt ETF to its highest level since 2008.
Combined, the two high-yield ETFs pulled in nearly $8 billion of net inflows in 2012. [Why Trading, Assets in High-Yield Bond ETFs are Exploding]
The junk debt funds are paying 30-day SEC yields of more than 5% although yields have been pushed down to record low levels due to seemingly insatiable demand for the bonds. Yields on 10-year Treasury notes are hovering around 1.8%.
Although investors don’t have many other options to boost income, some analysts are worried that junk bond yields aren’t enough to adequately compensate investors for holding speculative grade debt. [Junk Bond ETF Yielding Over 6% Sees Record Bearish Bets]
JNK and HYG posted total returns of more than 10% for 2012 amid the scramble for yield, according to Morningstar.
The rally has pushed the average yield on speculative grade bonds below 6% for the first time ever, reports Michael Aneiro at Barron’s.
“All of this has been enabled by the Federal Reserve’s ongoing efforts to pin down short-term interest rates near zero and force investors into riskier, higher-yielding asset classes, creating a barren, yield-free investing landscape in which ‘high yield’ now officially means less than 6%,” Aneiro writes.
Global high yield bond issuance rose 38% in 2012 to a record $395 billion, The Motley Fool reports.
iShares iBoxx High Yield Corporate Bond
Full disclosure: Tom Lydon’s clients own HYG and JNK.
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