Why are investors jumping to junk bond ETF's?

[John Naronha]

[Ignatius Bose]

Returns on treasury yields are dropping thick and fast and investors looking for higher returns have zeroed in on exchange trading funds that are tracking junk bonds. Investors generally go to junk or high yield bonds when treasuries and other investment grade instruments do not offer sufficient yields. In addition, if you’re sure that interest rates won’t be going up anytime soon, it’s worth the risk to put your money in these high-yielding bonds.

Investors have pooled in more than a billion dollars in the $9.3 billion SPDR Bloomberg Barclays high yield bond ETF (JNK) in just a few days during first half of this month with the pace of inflows boosting the fund’s assets by 13 percent.  The seven straight days of inflows in the second week of March is also the longest streak of investment that the fund has witnessed in the last 6-months.

Likewise, according to Bloomberg, investors poured in close to $850 million in three days in the $15.2 billion iShares iBoxx high yield corporate bond ETF (HYG) in the second week of May.

With the Fed unlikely to increase interest rates anytime soon, yields on the US 10-year Treasury bonds dropped to around 2.6 percent at the end of last year, boosting investments into junk bond funds, which helped them turnaround after a dismal 2018. While JNK is up more than 6 percent this year, HYG is higher by about 5.5 percent.