A risk-off sentiment was going to catch up to the junk bond market at some point as the major stock market indexes continue to see red. Getting high yield exposure was ideal in a low-rate environment, but as yields continue climbing, the bond markets have been in their own world of hurt.
Of course, the riskiest of bonds got a helping hand from the Federal Reserve at the height of the pandemic in 2020 in order to stave off a collapse in the debt market. The Fed was quick to scoop up risky assets in order to prop up the bond market, including high yield debt.
Now, as the Fed looks to unwind its balance sheet, which includes these assets purchased during the pandemic, it could cause mayhem for the riskiest bonds. It’s also forcing companies to cancel new deals as inflation fears and rising rates continue to rack the markets.
“Shock waves from the stock market’s declines are spreading into junk bonds, sending prices tumbling and forcing some companies to cancel new deals,” a Wall Street Journal report notes. “Average prices of U.S. high-yield bonds fell to around 91 cents on the dollar Monday, the lowest level since May of 2020 when pandemic shutdowns slammed the global economy, according to data from Bloomberg.”
Mitigate Risk and Shorten Duration
In the current bond environment, getting yield may not be as difficult, but mitigating rate risk will require short-duration exposure. Both yield and short duration are available in the Vanguard Short-Term Bond Index Fund ETF Shares (BSV ).
BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures, including all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued.
Highlights of BSV:
- Seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
- Invests in U.S. government, high-quality (investment-grade) corporate and investment-grade international dollar-denominated bonds.
- Follows a passively managed, index sampling approach.
For more news, information, and strategy, visit the Fixed Income Channel.