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High-Yield Coporate Bond Strategies Still in Favor

This article was originally published on ETFTrends.com.

Benchmark treasury yields ticked higher across the board, which saw the 10-year touch the 3% marker once again this year, but despite this, high-yield corporate bonds are still an attractive option as the extended bull market still has investors pushing the risk-on button. As the curtain closes on the bull run and the late market cycle, the natural propensity for fixed-income investors is to shift back to safer government debt, but until then, higher-yielding corporate bond strategies are still in favor.

Just like the first quarter of 2018, high-yield bond strategies led a Morningstar Inc list of top fixed-income performers again during the second quarter, taking seven out of the top 10 spots. High-yield bond strategies have been outperforming their investment-grade counterparts by an average of 2%.

This trend could persist for the next year or possibly two as the bull market continues its forward momentum.

"In the current environment, where the economic and corporate backdrop remain promising, corporate bonds should fare better than developed market sovereign debt," said Kerry Craig, global market strategist at J.P. Morgan Asset Management.  "Similarly, even if the anticipated total returns are modest, the riskiest section of corporate bonds, known as “junk bonds”, should beat higher-grade corporate bonds."

Additionally, Craig cites that its been high-yield, below-investment grade debt outperforming its higher credit quality peers.

"More favourable fundamentals still bode well for the high-yield segment of the corporate bond market," said Craig. "Investment grade credit indices have experienced a deterioration in credit quality and a commensurate rise in duration and leverage adding to vulnerabilities as interest rates rise."

Related: Bond ETF Investors Are Steering Toward High-Yield

High Yield ETF Options

Fixed-income ETFs with a high-yield focus like the  iShares iBoxx $ High Yield Corp Bd ETF (HYG) , SPDR Blmbg BarclaysST HY Bd ETF (SJNK) and iShares 0-5 Year High Yield Corp Bd ETF (SHYGcan give investors exposure to these high-yield strategies without the additional credit risk of investing in bonds directly.

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. Investors who have been able to forego the credit risk have seen total returns of 5.49% the last three years and 1.96% the past year based on Yahoo! Finance performance figures.

SJNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays US High Yield 350mn Cash Pay 0-5 Yr 2% Capped Index. SJNK invests its total assets in the securities comprising the index, which is designed to measure the performance of short-term publicly issued U.S. dollar-denominated high yield corporate bonds. The short-term maturities will help hedge some credit risk due to the lesser exposure, but holdings are still less than investment-grade. SJNK has returned 3.12% year-to-date, 4.09% the past year and 5.53% the last three years.

SHYG seeks to track the investment results of the Markit iBoxx® USD Liquid High Yield 0-5 Index, which is primarily composed of U.S. dollar-denominated, high yield corporate bonds with remaining maturities of less than five years. Like SJNK, debt maturities are shorter, thereby helping to hedge some credit risk, but issues are still less than investment-grade. Nonetheless, SHYG has managed to return 2.97% year-to-date, 3.75% the past year and 5.62% the last three years.

"The US high-yield market hasn’t experienced the deterioration in quality of its higher-quality cousin, as both the duration and the quality of the index have remained stable," said Craig. "The still-vibrant US economy will support high-yield corporate finances, keeping spreads contained."

For more trends in fixed income, visit the Fixed Income Channel.

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