High Yield ETFs just went negative in 2017, leaving many investors wondering if it is now time to move out of the asset class. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) are now down 0.28% and 0.33% year-to-date (YTD) as of Friday’s closing price. Investors are growing increasingly concerned that the Trump Rally may be showing cracks as plans to boost fiscal spending remain uncertain and the U.S. debt ceiling debate takes center stage in Congress again this week. (For more see: Is High Yield Headed For a Fall?)
Falling Oil Prices
Falling oil prices are not helping investor sentiment. Energy company debt still plays a large role in the U.S. high yield market, so falling oil prices hurt sentiment. Two major oil-related ETFs are having a particularly bad year in 2017. The United States Oil ETF (USO) and the iPath S&P GSCI Crude Oil Total Return ETN (OIL) are down 12.19% and 15.48%, respectively. Energy-related defaults remain a concern. Haynes and Boone, a law firm specializing in energy bankruptcies, report that as of the end of February 2017 there has been $5.5 billion worth of bonds affected by oil related corporate bankruptcies compared to only $312 million by the same time in 2016. (For more see: How Oil ETFs Perform Relative to the Oil Price.)
Moody’s Says Low Spreads Hide Default Risk
In the meantime, Moody’s published its weekly Capital Market Outlook report, in which they write, “An exceptionally thin median spread for default-prone Caa-rated bonds reflects an unsustainably high tolerance of credit risk.” Moody’s sees increased risk stemming from investors buying high yield bonds to improve return yields, instead of buying longer dated bonds for example. With a Federal Reserve interest rate increase all but priced in for the March 15th meeting, investors have avoided longer-dated bonds that are expected to underperform in a rising interest rate environment.
Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice. Gary does not own any ETFs mentioned in this article.