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Must-know: Corporate debt market reactions to FOMC minutes

Part 3
Must-know: Corporate debt market reactions to FOMC minutes (Part 3 of 9)

Must-know: Why junk bond returns were negative last week

Junk bond returns were negative last week

High-yield mutual funds recorded their third consecutive weekly inflow of ~$107 million in the week ending July 11. Net flows into high-yield mutual funds are up by ~$6.7 billion so far in 2014 (Source: Lipper).

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Yields and spreads analysis for high-yield debt

Both yields on high-yield (HYG) debt and the spreads between high-yield debt (JNK) and Treasuries increased over the week ending July 11. High-yield debt yields, as represented by the BofA Merrill Lynch U.S. High Yield Master II Effective Yield, increased by eight basis points to end the week at 5.38%.

The Option Adjusted Spread (or OAS) also increased. The BofA Merrill Lynch U.S. High Yield Master II Option-Adjusted Spread increased by 17 basis points to come in at 3.61% on July 11. This is the highest level for the OAS since early June.

Returns on high-yield debt

Bond yields and prices move in opposite directions. Due to the increase in yields, returns on high-yield debt were negative in the week ending July 11. The BofA Merrill Lynch U.S. High Yield Master II Index decreased by 0.18% over the week ending July 11. Returns in 2014 are positive overall, with the Index up by 5.50% so far this year—up to July 11.

Exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) were down by 0.26% and 0.46%, respectively, over the week.

HYG and JNK are up by 4.95% and 5.38%, respectively, year-to-date (or YTD). In contrast, the State Street SPDR S&P 500 ETF (SPY), the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), and the SPDR Dow Jones Industrial Average ETF (DIA) have returned 6.95%, 5.98%, and 2.54%, respectively (Source: Yahoo Finance, Market returns up to June 30).

In the next section, we’ll discuss the major reasons for the increase in yields for junk bonds last week. Please continue reading the next section in this series.

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