Dose of rates realism in the wake of the FOMC

Dose of rates realism in the wake of the FOMC (Part 1 of 5)

Must-know: High yield exchange-traded funds losing recent gains

High yield ETFs reverse gains

The HY CDX20 Index closed at 105.26 versus 104.16 the week prior, resulting in a strong 1.1% increase for the week. Year-to-date returns for the asset class total 3.19%.

The mainstream high yield ETFs, (JNK) and (HYG), climbed approximately 2.5% in the ten days preceding the FOMC (Federal Open Market Committee) announcement. But they have since reverted about a third of those gains.

US Fixed Income Markets 2013-09-26Enlarge Graph

The recent drop may be due to several reasons. One is that investors are taking gains after the sizable move following the announcement. Another is that while investors were pretty hyped that tapering hasn’t started yet, they may have finally realized that tapering will happen at some point in the near future.

Any juice left?

While the high yield bond market (HYG) may still have some juice left to squeeze, the next FOMC meeting will again increase volatility. Over the longer term, the market will fall as tapering begins.

Plus, if the debt ceiling debate starts to heat up and shows no solution, then Treasury yields could expand and cause bond prices to fall. So in the short to medium term, the high yield market is a bet on market timing more than long-term fundamentals.

Investors willing to enter the market now would have to watch their positions closely and be ready to move in case the tide swings in the opposite direction.

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