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High-Yield Bond Trouble Ahead?

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Although high yield bond ETFs (JNK) have lagged higher rated investment grade debt, the underperformance is far from bear market territory. JNK has edged out a 1.63% yearly gain. Will the possibility of higher interest rates rattle the high yield bond market?

Last year, nearly 80% of newly issued corporate debt was speculative rated (BB+ or lower) and Standard & Poor’s foresees big problems ahead.

“Despite the heightened risks associated with speculative-trade issuers, these borrowers have had little trouble attracting lenders in the U.S. due to persistently lower interest rates, said David Tesher, a S&P credit analyst. “We forecast a possible tightening of market access for these prolific issuers in the third and fourth quarters of 2015, as lenders become less yield-hungry and more selective about extending credit.”

In a blog post, Shane Shepard, head of Macro Research at Research Affiliates noted: “The consensus was that interest rates would rise in 2010. Then for sure in 2011, and again in 2012, 2013, and 2014. The markets paid no attention.”

Shepard points to imbalances in the labor market and how it will restrict the Federal Reserve from lifting interest rates. He argues that even if rates increase, the move higher will be “slow and not as high as many think.”