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.”
With Investors Piling Into Risky Debt, Yields Are Dropping Even Further February 10, 2021
Rates were at bottom-of-the-barrel lows during much of 2020, causing a voracious appetite for yield. This caused fixed income investors to pile into risky debt, and is now dropping yields further.
In the current market landscape, Treasury yields are starting to head higher. This, in turn, could cause a flight from riskier debt and back into more safe haven government debt.
In the meantime, the average yield on risky debt is starting to head lower.
“The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields,” a Bloomberg article noted. “The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.”