Primary drivers influencing the risks and returns
High-yield bonds—or junk bonds—are rated BB+ or below, according to the ratings guidelines provided by Standard & Poor’s. This implies that the issuers have a lower ability to service their debt obligations. This makes junk bonds more vulnerable to economic cycles—compared to investment-grade corporate bonds (or LQD). They’re higher risk securities, but they also offer higher yields as compensation.
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 (or PHB)—mainly invest in debt issued by high-yield corporate borrowers.
In this series, we’ll discuss the major trends in the primary and secondary markets for high-yield debt securities in the week ending October 10. You’ll read about junk bonds in Parts 2–5. We’ll cover leveraged loans in Parts 6–8. We’ll also analyze key return drivers for junk bonds and stocks (SPY) (QWLD).
Secondary market trends
While the domestic economy has been improving, high-yield bonds are showing more volatility. They’re widening credit spreads at a time when the spreads should decline. Volatility, as measured by the VIX (VXX), increased by ~46% last week. Also, despite the higher volatility, investor flows into high-yield bond funds were positive last week. You’ll read about these factors in Part 4 and 5 in this series.
Primary market trends
High-yield issuance volumes spiked by over 300% last week. We’ll discuss this in the next part of the series.
To read about the Fed’s take on credit conditions in the U.S. economy, read “Why the FOMC believes that credit conditions are still strong.”