Why Junk Bond ETFs Are Suddenly Treasured

Apparently, intrepid investors are developing a growing appetite for riskier investments such as junk bond exchange traded funds (ETFs). After a volatile and scary year, you can’t help but wonder what’s happening.

The yield margins of high-yield bonds over Treasuries are narrowing, as seen on the Merrill Lynch U.S. High Yield Master II index, which shrunk from more than 2.1% in February to 1.2% last Thursday, reports Tom Sullivan for Barron’s.

Demand for these junk bonds have been on the rise and the best performers were in health care and utilities. It is thought that the reason for the rally is that traditional high-yield investors never left the market but stuck it through the toughest of times.

Investors have looked to the riskier single-B securities from the double-B-rated issues. Time will tell if people will be interested in the even more riskier triple-C-rated bonds.

• State Street’s SPDR Lehman High Yield Bond (JNK): up 12.2% year-to-date; 13.6% yield
• iShares iBOXX $High Yield Corporate Bond (HYG): up 5.7% year-to-date; 11% yield
• PowerShares High Yield Corporate Bond (PHB): up 5.4% year-to-date; 11.5% yield

In other bond news:

In California, there is a budget gap of $21.3 billion. The state will cut $5.5 billion soon and a further fill the $26 billion hole over the next two years. The California general-obligation bonds were hovering around 1.5% last Friday.

• iShares S&P California Muni Bond Fund (CMF): up 4.3% year-to-date; 3.6% yield

The Treasury’s two-year note dropped to 0.85% last Friday. The 10-year yield closed at 3.43%. A major concern was over the outlook of a weaker dollar and the potential change in country’s debt rating by the S&P.

• iShares Lehman 1-3 Year Treasury Bond Fund ETF (SHY): down 0.3% year-to-date; 3.3% yield
• iShares Lehman 7-10 Year Treasury Bond Fund ETF (IEF): down 7.7% year-to-date; 3.9% yield

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