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Junk Bond ETFs: Yields Fall to New Record Low


The seemingly unstoppable rally in junk bond ETFs continues apace with yields in speculative-grade corporate debt falling to new record lows this week.

SPDR Barclays High Yield Bond (JNK) and iShares iBoxx High Yield Corporate Bond (HYG) have posted total returns of more than 10% for the trailing year. In a low-rate environment for bonds, investors have been drawn to the funds’ capital appreciation and above-average yields. Of course, there are lingering fears the ETFs’ popularity could end in tears as investors stretch for income by taking on more credit risk. [High-Yield ETFs Eye Multiyear Highs; ‘Gravity’ About to Kick In?]

On Tuesday, yields on speculative-grade debt fell to a record low of 5.56%, resuming their plunge after falling below 6% for the first time in January, reports Patrick McGee at The Wall Street Journal.

The two largest high-yield bond ETFs are paying 30-day SEC yields of just over 5%. [Comparing the Two Largest High-Yield Bond ETFs]

The latest week’s flow data revealed that investors are migrating back to high-yield ETFs and mutual funds after recently pulling cash on fears the asset class is overheated.

“Analysts said demand is rebounding on signs of an improving U.S. economy, which lifted the Dow Jones Industrial Average to another all-time high on Wednesday,” McGee reports. “Moreover, the number of companies defaulting on debt is low, and firms have amassed healthy levels of cash on their balance sheets.”

Despite the recent inflows, there are still signs investors are worried about a potential correction in high-yield bond ETFs. For example, short bets against junk debt ETFs are at all-time highs. [Record Bets Against High-Yield Bond ETFs]

SPDR Barclays High Yield 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.