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Why Junk Bond ETFs Are Picking Up Again

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This article was originally published on ETFTrends.com.

Speculative-grade corporate bonds and junk bond ETFs are picking up again, revealing the ongoing appetite for higher yielding bonds despite rising rate risks, large fund outflows and risk-off concerns.

Over the past month, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG ) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK ) , the two largest high-yield corporate bond ETFs by assets, have gained 0.9% and 0.7%, respectively. Nevertheless, HYG is still down 0.5% and JNK is 1.0% lower year-to-date.

According to Bloomberg data, speculative-grade bonds have returned 0.6% in April, compared to the negative 1.3% for investment-grade bonds, reports Sam Goldfarb for the Wall Street Journal.

The average junk bond yield was 3.33 percentage points higher than comparable Treasury yields, compared to a post-crisis low of 3.11 percentage points January 11, but it was still lower than the recent peak of 3.69 percentage points on February 9.

Is the Timing Right for Junk Bonds?

The tighter spread between junk and high-quality Treasuries reflects the confidence in credit quality of the bonds, which is often put into question during periods of economic stress as witnessed in the recent bout of volatility.

As yields on safer Treasury bonds rise, investors have shifted out of riskier speculative-grade debt and into the relative more attractive safer plays. Furthermore, some analysts attributed the shift to broader concerns over the value of riskier assets. So far this year, investors have yanked over $14 billion from high-yield mutual funds and ETFs.

Related: BulletShares Target-Date Bond ETFs to Hedge Rising Rate Risk

Due to their greater risk profile, high-yield bonds have been more correlated with major U.S. equity indices, which have experienced wider oscillations in recent months.

On the other hand, senior secured floating-rate bonds and related ETFs have attracted greater interest in a rising-rate environment since they come with an adjustable coupon, which helps diminish rate risk. Retail investors have funneled in more than $4 billion into loan funds this year. For example, the popular PowerShares Senior Loan Portfolio (BKLN) , which includes a floating interest rate component, has brought in $342 million in net inflows year-to-date, according to XTF data.

For more information on the speculative-grade debt market, visit our junk bonds category.

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