The threat of contagion from the eurozone debt crisis has gripped the credit market, sending yields on corporate debt to almost four month highs, as investors dumped speculative grade debt and "junk" bond exchange traded funds in favor of safe-haven assets.
According to the Bank of America Merrill Lynch Global Broad Market Corporate 7 High Yield Index, yields on corporate debt rose to their highest since Feb. 21, reports Sarika Gangar for Bloomberg. The spread between corporate and Treasuries expanded to 3.19% as of June 6 from the year's low of 2.64% on March 20.
High-yield issuance came to a screeching halt after Federal Reserve Chairman Ben Bernanke warned that the U.S. economy is threatened by the eurozone debt crisis and government budget cuts.
"We had a week of elevated concern about the path of the U.S. and global economy and, of course, we continue to worry about the European prospect," Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., said in the article.
Over the past month, investors have pulled billions out of high-yield corporate bond ETFs.
For instance, over May, the SPDR Barclays Capital High Yield Bond ETF (JNK) lost about $1.2 billion in assets under management and the iShares iBoxx High Yield Fund (HYG) diminished by $522 million.
PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB) logged redemptions of 1.6 million shares on Tuesday of last week valued at $29.5 million.
In contrast, the scramble for safety pushed the benchmark 10-year Treasury yields below 1.5%. The 10-year yields now sit at around 1.6%.
SPDR Barclays Capital High Yield Bond ETF
Max Chen contributed to this article.
Disclosure: I am long HYG. Tom Lydon's clients own HYG.