Returns on high-yield debt
Bond yields and prices move in opposite directions. Due to the decrease in yields, returns on high-yield debt were positive in the week ending August 15. As mentioned in the previous part, junk bond yields decreased by 0.29% over the week ending August 15 to 5.63%.
As a result, the BofA Merrill Lynch U.S. High Yield Master II Index appreciated by 1.06% over the week. Despite the correction in the week ending August 8, returns in 2014 are positive overall. The Index has increased 5.23% so far this year—up to August 15.
What this means for ETF investments?
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 also up. They were up because of the decline in yields. HYG was up by 1.14% over the week. JNK posted an increase of 1.20%. HYG and JNK are up by 4.62% and 4.97%, respectively, this year. The asset class yields environment had been favorable until late July.
Equity returns were also boosted during the week. The returns were impacted by easing international tensions and favorable corporate results in 2Q14. The iShares Core S&P 500 ETF (IVV) increased by 1.31% over the week. The SPDR Dow Jones Industrial Average ETF (DIA) clocked an increase of 0.78%. The PowerShares QQQ (QQQ) tracks the NASDAQ-100. QQQ was up by 2.63% over the week.
QQQ is composed of tech stocks like Apple and Microsoft. The rally in tech stocks has outpaced the broader S&P 500 Index. Earnings growth for tech companies basically outperformed the broader market. This is partly due to the economic cycle’s current stage. As economic growth increases in the U.S., firms usually increase tech spending. They would likely postpone tech spending in leaner years.
Outlook for high-yield debt
For most of 2014, junk bond yields were trending downwards in almost a straight-line fashion. In June, they reached a historically low level. Going forward, investors may see increasing volatility in high-yield debt in terms of yields and investor flows. Markets anticipate higher rates due to monetary tightening. Short-term profit-taking may be a key factor that affects flows and makes returns more volatile.
High-yield debt comes in different forms
In the next section, you’ll read about the key primary and secondary market trends in leveraged loans.