How high-yield bond markets react to higher market volatility

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Secondary market trends in high-yield bonds

High-yield debt mutual funds recorded a net outflow of ~$0.5 billion in the week ending October 17. This reversed the previous week’s trend with net inflows of $1.3 billion. Higher market volatility over the past week weighed in on investor sentiment. Investors tend to avoid riskier investments when market risks spike.

Including last week’s flows, net flows for high-yield bond funds are down by ~$5.6 billion so far in 2014. In comparison, investment-grade bond mutual funds are up by ~$67.8 billion year to date, while equity mutual funds are up by ~$90 billion.

Part 3

Yields and spreads analysis for high-yield debt

Despite the higher market volatility, yields on high-yield debt (JNK) fell in the week ending October 17. Yields, according to the BofA Merrill Lynch U.S. High Yield Master II Effective Yield Index, decreased by 10 basis points or 0.10% over the last week, to come in at 6.22% on Friday, October 17.

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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 (HYG) (PHB) securities, according to the BofA Merrill Lynch U.S. High Yield Master II Option-Adjusted Spread Index, rose marginally, by 2 basis points over the week to 4.68% on October 17.

Global growth concerns weigh in on stocks and high-yield debt

Yields had risen through Wednesday, on fears over growth in the Eurozone, China, and Japan. High-yield bonds are very sensitive to market risks and the outlook for economic growth. Despite the U.S. economy being in much better shape than the above-mentioned countries, U.S. junk bonds weren’t immune from the global turmoil that affected both stock (IVV) (QQQ) and bond markets on Wednesday. Junk bond yields spiked to 6.51% on Wednesday.

U.S. economic data benefits junk bond ETFs

However, better-than-expected domestic economic data pulled down yields on Thursday and Friday. Initial jobless claims fell to 264,000, their lowest level since April of 2000. This metric estimates the number of workers filing for first-time unemployment benefits.

Housing starts also came in at a better-than-expected 1.017 million in September. Healthy labor and housing markets are critical for economic growth. These exert a multiplier effect on consumption, manufacturing, and the construction value chain. Junk bond issuers find it easier to discharge their debt obligations under favorable economic conditions.

However, differences in credit quality has driven U.S. junk bond performance. Read the next section to learn more.

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