As big money managers quietly step back into the high-yield debt market following a steep sell-off this year, investors can also begin to take a second look at attractively priced speculative-grade bond exchange traded funds.
For instance, BlackRock Inc. and KKR & Co. Inc. are stepping back into junk bond and leveraged loan markets as prices in these bond segments now look relatively cheap, Bloomberg reported.
Mitchell Garfin, co-head of leveraged finance at BlackRock, argued that the credit risk is not as bad as many would think as most high-yield debt issuers show strong balance sheets. Garfin argued that defaults won’t be elevated even if the economy dips into a recession.
“Credit seems attractive on a long-term basis and particularly very attractive relative to equities today,” Chris Sheldon, co-head of credit and markets at KKR, told Bloomberg. “Fundamentals are going to slow and will continue to slow, however, we are not anticipating a massive spike of defaults.”
Sheldon also highlighted opportunities in the leveraged loans category and advised investors that it is a good time to pick up high-yield bonds that are cheaply priced.
Despite the rebound in July, the U.S. junk bond market is still off 10% this year while the average price of leveraged loans was 5.1% lower year-to-date.
The recent buying spree in the high-yield bond segment comes despite many banks cautioning of potential bumps ahead. For example, UBS Group AG strategists warned that U.S. speculative-grade bond spreads could widen to 650 basis points over the third quarter from 488 basis points. Additionally, Barclays Plc strategists projected spreads could widen to “recessionary levels.” Bond yields and prices have an inverse relationship, so rising yields would reflect falling prices.
“What we try to be mindful around is that these are still very fragile times, very unprecedented times,” Anders Persson, chief investment officer for global fixed income at Nuveen, told Bloomberg. “We would expect some volatility here going forward.”
ETF investors who are interested in the high-yield, speculative-grade corporate bond segment have several options to choose from, such as the iShares iBoxx $ High Yield Corp Bond ETF (HYG ), the SPDR Bloomberg Barclays High Yield Bond ETF (JNK ), and the Xtrackers USD High Yield Corporate Bond ETF (HYLB ).
Additionally, ETF investors can use the SPDR Blackstone/GSO Senior Loan ETF (SRLN ), the Invesco Senior Loan ETF (BKLN ), and the First Trust Senior Loan Fund (FTSL ) to access the senior loan segment.
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