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August 08, 2016 at 06:22 AM
Just short eight months ago, activist investor Carl Icahn referred to the junk bond fund market as a “keg of dynamite.” At that time, the junk bond market was in a temporary swoon. And while the risks are still very real, high-yield bond funds continue to deliver hot returns.
One proxy of performance, the SPDR High Yield Bond ETF (JNK), has gained 13% since mid-December compared to a 5% increase in the iShares Core U.S. Aggregate Bond ETF (AGG). After hitting an even lower low in mid-February, JNK is up 18.5% compared with just 3% in AGG.
High-yield bonds, sometimes referred to as “junk bonds,” are non-investment grade debt with a Ba1/BB+/BB+ or below rating using rating system of Moody’s Investors Service, Fitch Ratings, or Standard & Poor’s. Generally, the corporate debt issued by companies with a new credit history, a spotty track record of payments, or a heavy debt load are typically classified a “junk.”
Since the start of 2016, the yield on 10-year U.S. treasuries has dropped 30%. Because the relationship between bond yields and bond prices is inversely related, the decline in yields has pushed up the value of all bonds, including higher yielding issues.
High-yield bond funds have been among the top-performing bond fund categories this year, according to Morningstar data. As a group, the sector has risen 9.2% year-to-date and only mutual funds that invest in emerging market debt and long-term corporate and U.S. treasury debt have performed better, in the low double digits.
Among top performers within the high-yield group is the Catalyst/SMH High Income I (HIIIX), which has surged 26.3% year-to-date.
HIIIX carries a 30-day SEC yield of 8.83% and has almost 30% of its assets concentrated in just five high-yield bonds, with debt from Advanced Micro Devices being among the group. The $34 million fund is managed by Dwayne Moyers, who’s been at the helm since 2008, and Daniel Rudnitsky. Its annual expenses are 1.20%.
The Nuveen Symphony Credit Opportunities A (NCOAX) is another hot performer in the high-yield sector and has climbed 13.3%.
