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High-Yield ETFs in Danger of Fifth Week of Losses as Rates Rise


High-yield bond ETFs have dropped below a key technical indictor after four straight weeks of losses as interest rates move higher and punish investors who reached for income with junk debt.

The iShares iBoxx High Yield Corporate Bond (HYG) and SPDR Barclays High Yield Bond (JNK) have fallen under their 200-day simple moving averages. Combined, the junk bond ETFs have shed more than $1 billion of outflows so far in August.

The high-yield funds have been underperforming U.S. government bond ETFs with similar durations such as iShares 3-7 Year Treasury Bond ETF (IEI) over the past month. This is a potential red flag for credit markets.

Meanwhile, investors worried about the risks of rising interest rates have favored high-yield bond ETFs with shorter durations, such as PIMCO 0-5 Year High Yield Corporate Bond (HYS) and SPDR Barclays Short Term High Yield Bond (SJNK). [Short-Duration High-Yield Bond ETFs]

Even though the short-term junk bond funds will protect against rising interest rates, Louis Kokernak, principal at Haven Financial Advisors, told Investment News it’s important to keep in mind they won’t offer extra protection from the other spectrum of risk embedded in the funds — credit risk.

“If there’s a risk of recession, junk bond prices could crater,” he said in the report. “That’s true for short-term junk, too.”

iShares iBoxx High Yield Corporate Bond

Full disclosure: Tom Lydon’s clients own HYG and JNK.

The opinions and forecasts expressed herein are solely those of John Spence, 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.