Better Yields Were Still Luring Investors to Junk Bonds Last Week

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Better Yields Were Still Luring Investors to Junk Bonds Last Week PART 1 OF 6

US Stock Indexes Rose Slightly amid Dearth of Investment Options

US stock index up slightly

The three US equity indexes that we review in this weekly series rose from August 2–9, 2016. The rise was due to a lack of attractive investment alternatives available to investors in the rest of the world.

In a bid to earn better yields, investors kept investing in US stocks despite weaker corporate earnings and shaky economic fundamentals. Investors are favoring defensive sectors such as utilities (XLU) (ETR) (OGE) and telecommunications (VZ) since they’re considered safe in an economic downturn.

US Stock Indexes Rose Slightly amid Dearth of Investment Options

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Jeff Kravetz, regional investment strategist at the Private Client Reserve at U.S. Bank, said in an interview with CNBC on August 9 that there are “really just very few alternatives for investors around the world.” He added, “Investors are looking for return and yield, and the US is the best option for that.”

From August 2–9, 2016, the S&P 500 index, tracked by the Vanguard 500 Index Fund Investor Class (VFINX), and the SPDR S&P 500 ETF (SPY), rose 1.2% each. The Dow Jones Industrial Average (DJIA) rose 1.2%, and the NASDAQ rose 1.7%.

Marc Faber warns of stock market crash next year

Marc Faber, Swiss investor and author of the Gloom, Boom & Doom Report, believes the S&P 500 might lose half of its value by next year.

He said to MarketWatch, “Maybe we go first to 2,300, then we would have a perfect topping formation. A widening-top formation is about the most bearish technical formation you can have.” He added, “When it unravels, we are going to go to 1,100 on the S&P 500.”

High-grade bond market

Treasury yields rose across the curve for the week ended August 5, 2016. This came after the jobs report pointed to solid growth in the labor market and raised expectations of an interest rate hike in 2016. The stronger-than-expected employment report comes as good news after disappointing GDP growth in the first half of the year.

To find out more, you can read Treasury Demand Snapped after Robust Non-Farm Payrolls Report.

Investment-grade bond yields also rose last week. Issuance skyrocketed as foreign investors found US corporate bonds appealing. This was despite lower yields due to negative yields in other major developed nations. Read more at Microsoft Stormed the High-Grade Bond Market Last Week.

Junk bonds

Junk bond yields fell 7 basis points week-over-week and ended at 6.7% on August 5, 2016. Due to a fall in yields, prices of mutual funds and ETFs investing in junk bonds rose. These funds include the American Funds American High-Income Trust – Class A (AHITX), the T. Rowe Price High Yield Fund – Advisor Class (PAHIX), the SPDR Barclays Capital High Yield Bond ETF (JNK), and the iShares iBoxx $ High Yield Corporate Bond Fund (HYG).

In the rest of this series, we’ll look at developments in the primary and secondary markets for high-yield debt and leveraged loans.


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