Investors Have Grown More Comfortable with Junk Bonds April 13, 2021
As default rates among low-rated U.S. companies dropped to their lowest level in months, fixed income investors have grown more “risk-on.”
The
Additionally, ETF investors have exhibited a higher preference for riskier assets. Over the past week alone, the iShares iBoxx $ High Yield Corp Bond ETF attracted $1.7 billion in net inflows whereas the iShares iBoxx $ Investment Grade Corporate Bond ETF experienced $2.2 billion in net outflows, according to ETFdb data.
Bolstering the risk-on bets, default rates on low-rated U.S. companies declined to 3.15% as of March, their lowest level in 10 months, the Wall Street Journal reports.
The sudden spike in interest for junk-rated bonds reflects the ongoing reflation trade that has spanned across assets as the economic outlook improves. The improved outlook has weighed on bond markets and set yields soaring higher, but it has also improved demand for relatively lower duration junk bond ETFs.
“What we’ve had in bond markets for much of the year to date is a selloff in duration, which has meant that high yield, which is high spread and low duration, has been the safer asset class,” Peter Chatwell, head of multi-asset strategy at Mizuho International Plc, told Bloomberg. “These flows reflect that, and we expect there will be further moves in that direction as U.S. growth becomes more broad based and helps to support the rest of the world.”