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Is it Still High Times for High Yield?

This article was originally published on ETFTrends.com.

After the volatility-laden tumult seen towards the end of 2018, investors are starting to dip back into the high yield waters thanks to life in U.S. equities.

Exchange-traded fund (ETF) flows are showing that a risk-on sentiment is slowly creeping back into the markets, making the case for high-yield bond funds again. A volatile end to 2018 no doubt elicited a risk-off sentiment that permeated throughout the capital markets, but thus far in 2019, high-yield bond funds experienced an aggregate one-month inflow of $2.2 billion, according to data from XTF.

Names like the iShares iBoxx $ High Yield Corp Bond ETF (HYG) have been leading the recent charge for high yield. According to data from XTF, fund flows within the past month have topped over $1 billion for HYG.

However, the risk of corporate default looms and this could be what ultimately sends the economy into a recessionary state.

Recession Risk from Corporate Debt Default

According to Guggenheim Partners’ Scott Minerd, a spike in corporate defaults could be exactly what causes the party to end for all markets. The amount of corporate indebtedness has reached unprecedented levels, which has made these companies more susceptible to rising interest rates or worse, a recession.

“Whether the recession causes the defaults or the defaults cause recession, I don't know how the causality runs,” said Minerd at the World Economic Forum in Davos. “But I think, you know, we've got some runway left. I think another year or so of this before the defaults start to kick in. But, you know, we've got a little bit of a flavor for it over the last six weeks with some of the things we've seen in the corporate bond market, and I think we're just getting warmed up for the real party.”

The Federal Reserve raised the federal funds rate four times 2018 and in its last rate hike in December, the central bank is expecting two more for 2019. However, Minerd feels that if the economy is growing faster than expected, more rate hikes could come--a scenario that could make things more tenuous for these indebted corporations.

“The Federal Reserve, I think, will get back into the interest rate hiking mode,” he said. “We're beyond full employment. The economy is growing faster than potential. And somewhere, you know, in the next six to 12 months, I think the Fed is going to realize, you know, inflationary pressures are mounting, and they're going to have to react to it.”

For more market trends, visit ETF Trends.

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