Non-Investment Grade Bonds Remain Attractive

Non-Investment Grade Corporate Bonds (Junk Bonds) have been very popular in recent years with investors stretching for yield as the Federal Reserve holds short-term rates near zero.

That demand has pushed debt prices higher and yields on some junk bond exchange traded funds  below 5% for the first time. For example, iShares iBoxx High Yield Corporate Bond Fund (NYSE: HYG) has a 30-day SEC yield of 4.88%. The ETF holds $15.5 billion in assets.

“The five biggest ETFs that focus on speculative- grade debt have amassed more than $30 billion in the six years since the first such fund was created,” Bloomberg reports.

High-yield bond ETFs continue to march higher despite some recent weak economic data.

“With defaults low, balance sheets healthy and rates going nowhere anytime soon, this playbook grows ever more popular,” writes Josh Brown at the Reformed Broker blog.

“The combination of negative real yields in high quality bonds, yet on average reasonably healthy corporate fundamentals, support taking credit risk over interest rate risk,” Merrill Lynch Wealth Management said in areport. “We do not see credit metrics flashing red yet and as long as corporations are maximizing their profit margins, we are comfortable that the extra risk in higher yielding bonds has the potential to be rewarded. We remain on the lookout for any signs of weakness in corporate balance sheets and while the rate of improvements has slowed, overall non- financial balance sheets remain healthy.”

Source:  John Spence, ETF Trends

Non-Investment Grade Corporate Bond exchange traded fund Peritus High Yield (HYD) is a component of the the D2 Capital Management Multi-Asset Income Portfolio and is currently yielding 8.19% (Morningstar, 10 April 2013).

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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