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Analyzing secondary trends in high yield debt securities

Phalguni Soni

Why did trends diverge for corporate borrowers? (Part 3 of 9)

(Continued from Part 2)

Secondary market activity in the U.S. high yield bond market

Investor flows into high yield (HYG) mutual funds reversed their trend in the week ended June 27. High yield (JNK) mutual funds recorded net inflows of $619 million in the week, compared to a net outflow of $239 million in the week ended June 20. This brought the total year-to-date inflows into high-yield mutual funds to $6.5 billion (Source:Lipper).

Let’s take a closer look at what you can expect in return.

Returns on high yield debt in 2014

As you saw in the previous part of this series, returns on high yield debt correlate more to stock market (VOO) returns than returns on other forms of debt—like U.S. Treasuries (IEF) or investment-grade corporate bonds (LQD). This is because, when the economy is expanding, the spreads between investment-grade (BND) and non–investment-grade bonds usually decline due a belief that HY debt issuers would be more able to service their debt obligations.

High yield debt returns, measured by the BofA Merrill Lynch US High Yield Master II Total Return Index Value, were marginally negative in the week ended June 27. They came in at -0.01%. Year-to-date returns, however, are positive at 5.63%.

In comparison, the Vanguard S&P 500 ETF (VOO), which tracks the S&P 500 Index, has returned 4.85% in 2014 year-to-date. The S&P 500 Index fell 0.1% in the week ended June 27, finishing at 1,960.96 on June 27 (Source: Yahoo Finance: Market returns through May 31, 2014).

Learn more

To find out why returns on high yield debt reversed their trend and turned negative last week, read on to the next part of this series.

Continue to Part 4

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