Why Demand Is High For Junk Bond ETFs

As corporate bonds have started to lose their popularity with investors, some suggest that an opportunity in junk bonds and their exchange traded funds (ETFs) might exist and for good reason.

On the one hand, sterling corporate bond prices have been rising. This has been pushing yields down, causing some to second guess whether corporate bonds are the place to be. If this turns out to be the case, then a massive selloff could result, states Matthew Vincent of The Financial Times.

However, analysis of corporate bond spreads tells a different story. Spreads, better known as the difference between the yields on corporate bonds and on safer government bonds,  widened to record levels after Lehman Brothers collapsed last year.

Corporate bond prices fell rapidly in anticipation of widespread defaults by other issuers. This pushed the effective yields from bonds’ fixed-income payouts up toward double figures, suggesting that they are not overbought.  To add icing to the cake, it appears that supply for these bonds, in particular the more risky junk bonds, cannot keep up with demand.

An easy way to access the junk bond market is through the following ETFs:

• iBoxx $ Liquid High-Yield (HYG): up 22.2% year-to-date and has a yield of 9.9%

• PowerShares High Yield Corporate Bond (PHB): up 18.1% year-to date and has a yield of 9.3%.

• SPDR Barclays Capital High Yield Bond (JNK): up 31% year-to-date and has a yield of 12.4%

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