Relative yields on junk bonds have widened to levels that would signal default rates at three times current levels, according to InvestmentNews. Yields on speculative, junk-rated debt increased 2.07% to 7.61% over the last two months on growing Eurozone concerns.
“The high-yield market is a great long-term investment at this point and these spread levels,” said James Keenan, who oversees BlackRock’s $28 billion leveraged finance unit, in the report. “In July we were much more defensive, and we had sold out and built a significant cash position.”
“The high-yield market is in a good space,” BlackRock’s Keenan added. “Balance sheets today look better than they did in 2006 and 2007.”
After spreads on high yield bonds jumped to 7.64% on Sept. 12, funds that hold debt ranked below Baa3 or less than BBB- experienced inflows of $210 million last week after losing $6.4 billion in August, according to JP Morgan research.
JP Morgan analysts project defaults could peak at 6% in a U.S. recession. Relative yields on high-yield bonds indicate default rates of 7.4%, or six times the 1.2% current rate, the analysts added. Moody’s data shows that U.S. corporate default rates dropped to 2.1% in August from 2.3% in July.
High-yield ETFs include:
- iShares iBoxx High Yield Corporate Bond Fund (NYSEArca: HYG). HYG has a 12-month yield of 8.06%.
- SPDR High Yield Bond ETF (NYSEArca: JNK). JNK has a 12-month yield of 8.28%.
Max Chen contributed to this article.