High-yield, speculative grade, junk bond exchange traded funds hold up against other fixed-income assets in a rising interest rate environment.
Most fixed-income assets have been selling off as yields on benchmark 10-year Treasuries rose from its 1.63% low in May to as high as 3.0% earlier this month. Bond prices and yields have an inverse relationship, so rising rates translate to lower prices.
However, junk bonds, a riskier asset, are more correlated to the health of the equities market.
"Certain sectors of the bond market react differently to rising rates," according to Morningstar senior fund analyst Cara Esser. "For example, more-credit-sensitive bonds, like high-yield corporates, tend to react less negatively to rising rates than do bonds with more interest-rate risk, such as a U.S. Treasuries."
"For those of you who are worried about rising rates, high yield is likely to continue to outperform relative to other fixed income markets in that environment," Henderson Global Investors fund managers Chris Bullock, said in a Fundweb article.
HYG has a 5.57% 30-day SEC yield and a 4.25 year effective duration - duration is a measure of a bond's sensitivity to changes in interest rates. JNK has a 5.91% 30-day SEC yield and a 4.43 duration.
Meanwhile, the iShares 3-7 Year Treasury Bond ETF (NYSEARCA:IEI), which has a similar duration of 4.44 years and a 1.29% 30-day SEC yield, fell 2.6% year-to-date. Moreover, the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEARCA:LQD), which tracks investment grade corporate debt and has a 3.72% 30-day SEC yield and a 7.39 year duration, declined 5.6% year-to-date.
Max Chen contributed to this article.
Full disclosure: Tom Lydon's clients own HYG and JNK.
Disclosure: I am long HYG, JNK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.