High-yield hunger’s return fuels $1-billion rally

Widespread anxiety has investors rushing back into US junk-bond funds

High-yield hunger’s return fuels $1-billion rally
US junk-bond funds have attracted more than US$1 billion in a week — a feat the segment accomplished only five times previously this year, with the last instance back in June.

It was a much-needed shot in the arm for the risky debt segment that many investors have fled over this summer, according to the Financial Times. The junk-bond market has spent several months trading mostly sideways over concerns of an overheating corporate bond market. Wells Fargo reports that companies have issued US$172 billion in high-yield debt so far this year — a 12% bump over the same period in 2016 — which has not helped allay investors’ fears.

With the recent rally, this year’s cumulative outflows have been trimmed down to US$2.8 billion, according to EPFR. After an extended run, demand for riskier assets has tripped over market jitters caused by North Korea and political unrest surrounding the Trump administration.

August saw roller-coaster movements in high-yield bonds. HYG and JNK, the two most popular ETFs covering the segment that together have US$32 billion in assets, tripped by 0.1% in spite of support from falling benchmark bond yields. More daring corporate-debt issues rated CCC or lower shed 0.8%, the worst hit since February 2016.

But as yields for safer corporate and government debt tumbled — the 10-year Treasury yield has slid to nearly 2% — investors have rediscovered their appetite for riskier but higher-yielding debt.

According to a note by JPMorgan strategist Lixin Bao, US corporate bonds are also benefitting from robust economic growth, healthy earnings, and falling default rates.

“With solid macro momentum in the third quarter, strong earnings guidance, and without aggressive Fed hikes causing an abrupt end to the current expansion, we continue to favour high-yield corporates that are cyclically attractive,” she said.

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