Must-know: Returns on junk bonds and stock market ETFs


Aug. 18 2020, Updated 9:32 a.m. ET

High-yield debt in the week ending October 10

Yields on high-yield debt (JNK) increased last week. Yields—as measured by the BofA Merrill Lynch U.S. High Yield Master II Effective Yield Index—increased by 21 basis points, or 0.21%, over the week. They came in at 6.32% on October 10.

Yields on corporate debt securities, including high-yield bonds, 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 U.S. High Yield Master II Option-Adjusted Spread Index—increased by 37 basis points, or 0.37%, over the week. They came in at 4.66%.

Part 4

Returns analysis

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Bond prices and yields move in opposite directions. When yields rise, bond prices fall and vice versa. Due to the increase in yields, returns on high-yield debt were negative last week. The prices of popular exchange-traded funds (or ETFs) investing in high-yield debt fell over the week ending October 10.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) declined by 1.7%. The SPDR Barclays Capital High Yield Bond ETF (JNK) decreased by 1.9%. Exchange-traded funds (or ETFs) track major stock indices like the SPDR S&P 500 ETF (SPY) and the SPDR MSCI World Quality Mix ETF (QWLD). They also fell by 3% and 0.4%, respectively, over the week.

Volatility also increased last week. The VIX increased ~46% over the week. This benefited the price of the iPath S&P 500 VIX ST Futures ETN (VXX). It increased by ~21%.

Why did yields on high-yield bonds rise and stock prices fall? We’ll discuss this in the next part of the series.

Click here to learn more about high-yield, or junk-rated, debt.


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