Definitive factors in high-yield bond investing
High-yield, or junk-rated, bonds have higher yields than investment-grade bonds—like U.S. Treasuries and high-quality corporate debt. They’re issued by borrowers with higher credit risk—for example, with a lower ability to service the debt issued. Investors need a higher return to compensate for the higher risks involved.
Exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), the SPDR Barclays Capital High Yield Bond ETF (JNK), and the PowerShares Fundamental High Yield Corporate Bond ETF (PHB) mainly invest in debt issued by high-yield corporate borrowers. ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) invest in debt issued by the U.S. Treasury. Treasuries have non-existent credit risk because they’re backed by the U.S. government’s full faith and credit. Due to the low credit risk involved, Treasuries offer the investor much lower yields.
Impact of the Fed’s accommodative monetary policy since the Great Recession
The Fed’s easy money policy has been in place since December 2008. It resulted in historically low Treasury yields. A low and decreasing yields environment translated across bond markets. This resulted in lower yields for corporate debt securities. Bond yields and prices move in opposite directions. Low yields resulted in higher bond prices. This benefited bond markets. Investors were also drawn towards high-yield bonds because higher-quality debt offered very low yields.
In 2013, high-yield debt markets got a another boost as the economy recovered. The S&P 500 Index returned over 32% in 2013. This benefited ETFs like the SPDR S&P 500 ETF (SPY). An improving economy usually reduces credit spreads for high-yield debt issuers. Their ability to service debt is believed to improve. Delinquencies are lower. This benefited PHB, HYG, and JNK.
High-yield debt market activity in the week ending September 12
This year, the high-yield bond market has seen several twists. In this weekly update, you’ll read about recent primary and secondary activity in junk-rated debt.
Visit the Market Realist High Yield Bond ETFs page to learn more about high-yield bonds.