By Michael Aneiro
The high–yield bond market has been suffering lately, and yesterday’s bizarre, wild ride for bonds and stocks alike didn’t do junk bonds any favors, with that market down another 0.55% yesterday, per a benchmark Bank of America Merrill Lynch index. High yield is now down 1.5% over the past week, 2% over the past month and 2.8% since July, trimming year-to-date returns to 2.5%.
Where there’s a rout, there’s a buying opportunity. The average high-yield bond spread over Treasuries has climbed to 508 basis points, meaning junk bonds now yield more than 5 percentage points more than comparable Treasuries. That’s up by 1.6 percentage points from the low spread of about 340 basis points seen in June, when the average junk-bond yield had fallen to a record-low just under 4.9%. The market’s average yield is up to a much healthier 6.49% today.
Yesterday BlackRock said it’s been buying more junk bonds lately, particularly with high-yield bond yields moving in the opposite direction of plunging Treasury yields. Today UBS Wealth Management says it too is adding to its high-yield holdings, specifically selling some Canadian equities – which have been hit hard by the sharp drop in energy prices – to make room for more U.S. junk bonds. Here’s what UBS has to say today:
We believe there has been shift in the relative attractiveness between the equity risk premium and the more defensive credit risk premium, and we add to overweight position in US high yield credit. The recent sell off provides a spread to Treasuries of c. 500bps, or an absolute yield-to-worst of c.6.3%. With the fundamental economic situation in the US still positive, we expect default rates to remain below 2%, allowing for a total expected return of 5-6% over the coming six months, based on our forecasts.
The two big high-yield exchange-traded funds are holding steady Thursday, with the iShares iBoxx $ High Yield Corporate Bond (HYG) up 0.1% at $90.57 while the SPDR Barlcays High Yield Bond ETF (JNK) is off 0.3% at 39.37.
