Why Junk Bond ETFs Are Calling To Investors

While most investors were mostly preoccupied by the strong rallies in the stock markets and exchange traded funds (ETFs), the bond market has enticed investors with high bond yields.

Standard & Poor’s commented that issuers are favoring the high-yield bond market over the leveraged loan market, with 86% of speculative-grade debt in bonds during the first nine months of the year compared to 45% in the same period last year, reports Tess Stynes for The Wall Street Journal.

Issuers are seeking the less restrictive terms and longer maturities offered in bonds. Though, high-yield debt does come with higher financing costs when companies try to refinance. (To read more about using bond ETFs, go here).

Some analysts fear that a new bubble may be forming on Wall Street as investors chase down returns, and some are warning that the hike in bond prices may roll back if the economy stumbles and investors run back to safer investments, writes Jack Healy for The New York Times. Struggling companies would then be forced to pay higher rates to take on more debt or refinance old bonds. (Read more about protecting yourself from bubbles here).

Longtime analysts and fund managers are amazed by the investor interest in bonds this year. The risk premium of bonds over Treasuries, or “spread,” dropped to 7.5% from more than 16% in the beginning of the year. Bond yields are above their historic averages, however.

• SPDR Barclays Capital High Yield Bond (JNK): up 28.6% year-to-date ; yield is 12.9%

• iShares iBoxx $ High Yield Corporate Bd (HYG): up 20.3% year-to-date; yield is 10.5%

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