Another one of the more prominent themes among bond
last year was growing speculation that high-yield bonds were
approaching bubble territory. Calls for asset bubbles is an old
investing avocation, and since the global financial crisis, it
seems that every time an asset class's popularity rises too quick
for the comfort of some, a bubble must be right around the
Talk of a junk bond bubble seemed to start in earnest in the
second quarter of 2012,
prompting a spate of coverage of the topic
. Later in the year, there were reports of redemptions from popular
junk bond ETFs such as the iShares iBoxx $ High Yield Corporate
Bond Fund (NYSE:
Those reports may have fueled the fire of the junk bond bubble
prediction, but most mainstream media coverage of the issue ignored
the fact that while HYG saw some modest outflows here and there,
some other new high-yield bond ETFs became home to
In other words, some important points about the efficacy of a
junk bond bubble in the current environment are being missed,
according to Market Vectors Portfolio Manager Fran Rodilosso.
"I think there is a difference so far between what we are seeing
at the beginning of 2013 and the types of credit bubbles we have
seen historically," said Rodilosso. "A bubble is built on excessive
leverage, and modern bubbles have been fueled by leveraged buyouts,
real estate speculation, and structured products with a high degree
of embedded leverage."
While 2013 is still young, investors to this point, have scoffed
at talk of junk bond bubble, sending major high-yield bond ETFs
modestly higher to start the new year. HYG, the largest junk bond
ETF by assets, is 0.7 percent to start the new year while its
primary rival, the SPDR Barclays High Yield Bond ETF (NYSE:
) has gained 0.1 percent.
Noteworthy is the fact that the SPDR Barclays Short Term High
Yield Bond ETF (NYSE:
), JNK's short duration equivalent, now has almost $668.6 million
in assets under management,
according to State Street data
. That is up from $518.7 million on December 4.
Clearly, quantitative easing, which has depressed yields on U.S.
Treasuries, has contributed to a yield chase. However, as Rodilosso
notes, credit spreads between junk bonds and Treasuries are not at
"Yields have been pushed down by a highly aggressive central
bank policy, with the result that yield-oriented investors have
been pushed into owning lower-rated credits," said Rodilosso. "As a
result, the yields on riskier debt are as low as they have been.
But the credit spreads, the difference between the yield on high
yield bond and a Treasury security, are actually closer to their
One issue that may be fueling the junk bubble chatter is new
issuance, which rose to an
all-time high of $306 billion through the end of
In years past, that might have implied increased leveraged
buyout activity or companies using debt to fund dividends, but
Rodilosso highlights a different possibility.
"Whereas during a more 'classic' bubble a vast majority of debut
issuance has historically funded takeovers, dividends, and massive
capital spending, 2012's record issuance was still, for the most
part done for the purpose of refinancing. That refinancing was done
at lower interest rates, reducing the cost of debt for many
borrowers, while reducing the amount to be paid back over the next
Rodilosso oversees $1.4 billion in assets across several Market
Vectors ETFs, including the Market Vectors Fallen Angel High Yield
Bond ETF (NYSE:
) and the Market Vectors Emerging Markets Local Currency Bond ETF
For more on bond ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment advice.
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