Junk Bond ETF Investors Are Getting Optimistic

Includes: HYG, JNK
by: Tom Lydon

Over the past month, investors scaled back on risk and shifted money into safe havens like U.S. Treasuries. Consequently, high-yield bond exchange traded funds have suffered a dramatic sell-off. But there’s optimism that high-yield bond ETFs will benefit from today’s economic environment.

Doug Forsyth of Allianz Global Investors Capital believes that “the stronger-than-expected economic recovery, a firmer earnings environment and historically low interest rates puts U.S. high-yield bonds in a sweet spot,” reports Katrina Nicholas of Business Week.

More specifically, Forsyth predicts that companies rated between B and BB will appreciate the most over the coming year. He cites that companies with such ratings had an average of 30% year-over-year increase in cash flow for the first quarter.

Further, according to a National Association for Business Economics survey of economists, the U.S. economy is estimated to grow 3.2% annually through 2011. That is higher than earlier estimates.

Junk bonds have returned 7.2% so far this year, according to the Bank of America Merrill Lynch High Yield Master II Index.

  • iShares iBoxx $ High Yield Corporate Bond (NYSEARCA:HYG)

  • SPDR Barclays Capital High-Yield Bond (NYSEARCA:JNK)

Disclosure: Tom Lydon’s clients own shares of JNK.

Sumin Kim contributed to this article.