As confidence in a sustainable economic recovery continues to remain wary, unemployment remains high, the equity markets remain volatile and consumer demand grows at a snail’s pace, high yield corporate bonds, and the exchange traded funds that track them, could pose an opportunity for investors.
One of the biggest reasons that these bond ETFs have appeal is the widening spread between the yields they offer as compared to those offered by US Treasuries. Some of these high-yield instruments offer 12-month yields greater than 7% as compared to a mere 0.11% offered on a 12-month Treasury note.
A second reason to consider high-yield bonds is that corporate debt levels have been falling and overall debt burden on balance sheets has been declining. One of the reasons for decreasing debt burdens is the low interest rate environment that is currently prevailing which allows companies to refinance their debt at lower rates.
Lastly, defaults on high-yield corporate bonds are well below historical rates. One reason behind this is more stringent lending regulations. Another reason is that companies that survived the Great Recession, did so for a reason and are likely to remain afloat in the near term future.
Some ways to play high-yield corporate bonds include:
- iShares iBoxx $ High Yield Corporate Bd (HYG), which boasts a 12-month yield of 7.97%
- SPDR Barclays Capital High Yield Bond (JNK), which boasts a 12-month yield of 7.43%
- PowerShares Fundamental High Yield Corporate Bond Fund (PHB), which boasts a yield of 6.25%.
Disclosure: Long HYG