Overview: The secondary market trends in high-yield bond ETFs

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Secondary market trends in high-yield bonds

Investor flows in mutual funds for various assets are key momentum indicators for the asset class. Although they typically lag market sentiment, they provide valuable clues for gauging investor behavior.

High-yield debt mutual funds recorded a net outflow of $198 million in the week ended September 5. This was the first net outflow in four weeks. High-yield bond funds had recorded net inflows of $672 million in the previous week. Including last week’s flows, net flows for high-yield bond funds are down by ~$1.94 billion so far in 2014. (Source: Lipper)

Yields and spreads analysis for high-yield debt

Yields on high-yield debt (JNK) rose last week. Yields, as measured by the BofA Merrill Lynch US High Yield Master II Effective Yield Index, increased by 25 basis points, or 0.25%, over the week, coming in at 5.75% on September 5.

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Yields on corporate debt securities are based on a spread over Treasury securities of similar maturities. The option-adjusted spread (or OAS) for high-yield debt securities, as measured by the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread Index, rose by 13 basis points over the week to 3.93%.

Bond prices and yields move in opposite directions. When yields rise, prices tend to fall, and vice versa. So returns on high-yield debt were negative last week.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) declined by 0.59% over the period from August 29–September 5. The SPDR Barclays Capital High Yield Bond ETF (JNK) decreased by 0.58% over the same period.

The SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK) fell by 0.26%. SJNK has holdings in shorter-term debt. Short-term debt investments have lower interest rate risk than debt of longer maturities. So SJNK’s prices tend not to fall as much in response to adverse yield movements, as compared to JNK and HYG.

In comparison, the SPDR S&P 500 ETF Trust (SPY) rose by 0.20% over the week. The iShares 7–10 Year Treasury Bond (IEF) declined by 0.82% due to an increase in Treasury yields. Seven-year and ten-year Treasury yields rose by nine and 11 basis points respectively over the week ended September 5.

Why did high-yield bond yields rise? Find out in the next part.

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