Must-know: Good news for high yield debt ETFs

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Current conditions in junk bonds and leveraged loans ahead of the Fed’s FOMC

It’s the middle of the earnings season. Major U.S. stock indices like the S&P 500 Index (SPY) and the NASDAQ-100 (QQQ) posted some very large gains in the week ending October 24. They were boosted by upbeat corporate earnings and bullish US economic indicators covering a broad range of sectors.

High yield bonds and stocks typically have a high returns correlation. Investor momentum trended positive for high yield bonds too, last week. That said, the process of price discovery in high yield debt markets was very much evident. Investors continued to be choosy in their preferences for junk bond and senior loan offerings in the primary and secondary markets.

Part 1

ETF impact of market conditions

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In this weekly series, we’ll discuss why the tide appeared to be turning for high yield debt ETFs. We’ll examine trends in both the primary and secondary markets. You’ll learn about how market conditions impacted the returns on high yield debt ETFs like the SPDR Barclays Capital High Yield Bond ETF (JNK), the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), and the PowerShares Fundamental High Yield Corporate Bond ETF (PHB).

Plus, we’ll compare the performance of junk bonds with leveraged loans (BKLN) as well as stock market ETFs like the S&P 500 ETF (SPY) and the PowerShares QQQ (QQQ).

U.S. financial markets await tapering decision at the Fed’s October FOMC

The Fed will release its statement following its October Federal Open Market Committee (or FOMC) meeting this week on Wednesday, October 29. Stock and bond investors are eagerly awaiting the release. The Fed may announce an end to the monthly bond purchases, or the third round of Quantitative Easing (or QE3) at the end of the meeting.

Tapering bond purchases will likely affect Treasuries and investment-grade debt more than junk bonds. Read about the impact of the Fed’s taper in Why the October FOMC and 3Q14 GDP will impact high-quality bonds.

The next section of this series will discuss the impact of tapering on the junk bond primary market.

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