In a recent blog post, iShares Global Chief Investment
Strategist Russ Koesterich said he is neutral on high-yield
bonds. Koesterich notes junk bonds "are close to fair value" and
he recommends that "investors generally maintain a benchmark
according to a note on the iShares blog
Despite some controversy,
junk bond ETFs remain popular with investors that
are searching for income and yield
. In addition to being a favored asset for income investors, junk
bond ETFs have also been solid performers in 2012.
The iShares iBoxx $ High Yield Corporate Bond Fund (NYSE:
), the largest high-yield bond ETF, is up almost two percent
year-to-date while the rival SPDR Barclays Capital High Yield
Bond ETF (NYSE:
) is up nearly 2.7 percent. The SPDR Barclays Capital High Yield
Bond ETF is the second-largest high-yield bond ETF behind
Those year-to-date performances may not speak to Koesterich's
assessment of high-yield bonds being close to fair value, but HYG
and JNK have surged in the past month, perhaps indicating there
is something to be said for these funds nearing frothy prices.
Since June 5, HYG has jumped 5.4 percent while JNK has added 4.7
Koesterich did say there are three instances in which he would
advocate investors take an aggressive view of high-yield bonds.
One scenario would be if spreads between junk bonds and 10-year
"Assuming no further deceleration in the US economy, any
further widening of high yield spreads back toward a premium of
650 to 700 basis points over the 10-year Treasury would represent
a good buying opportunity, especially considering that many
corporate balance sheets generally have been extremely strong and
default rates have been low," Koesterich said in the blog
Second, investors with high income needs should consider junk
bonds, Koesterich said. He notes conservative investors may want
to hold just 10 percent of their fixed income portfolios in
high-yield bonds, but those "willing to take incremental risk to
earn additional income may want to consider holding as much as 30
percent of their fixed income portfolio in high yield."
Finally, Koesterich said investors that are concerned about
rising interest rates "may also want to add high yield as a
substitute for long-dated Treasuries." Junk bonds are less
sensitive to even small changes in interest rates than long-dated
Treasuries as junk issues typically have lower durations.
HYG, which currently yields seven percent, has an effective
duration of just over four years, according to iShares data. JNK,
which yields almost 7.4 percent, has a modified adjusted duration
of 4.32 years, according to the SPDRs web site.
For more on junk bond ETFs, click
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