MW Junk bonds are beating the broader market so far in 2024 - but watch this shift
By Christine Idzelis
'A slow but unmistakable shift from credit risk to rates risk is underway,' says BofA
Junk bonds are beating the broader U.S. fixed-income market so far in 2024 - but pummeled Treasurys have attempted a comeback lately.
"A slow but unmistakable shift from credit risk to rates risk is underway," credit strategists at BofA Global Research said in a note Friday. Bond investors are moving away from the lowest-quality credit risk and toward "better quality and duration," their research found.
Exchange-traded funds that track high-yield corporate debt - also known as junk bonds, due to their below-investment-grade ratings - are in positive territory in 2024. By contrast, safer U.S. Treasurys with long-term durations are down this year, even after staging a bigger rally than junk bonds over the past month.
Bets on higher quality and duration in bonds may fare relatively well amid a slowing economy, a backdrop of moderating inflation and as interest-rate cuts expand globally, according to the BofA note. Central banks have already lowered rates in Europe and Canada, the strategists noted, while the Federal Reserve has penciled in one potential rate cut for 2024.
Junk bonds are risky, but they're paying off so far in 2024 as the U.S. economy continues to grow, even as it shows signs of slowing.
The iShares iBoxx $ High Yield Corporate Bond ETF HYG has returned a total 2.6% this year through Friday, while the SPDR Bloomberg High Yield Bond ETF JNK has gained 2.7% on a total-return basis over the same period, according to FactSet data. Both ETFs are beating the iShares Core U.S. Aggregate Bond ETF AGG, which is about flat in 2024 based on its total return through Friday.
But long-term Treasurys have slumped in 2024, with the iShares 20+ Year Treasury Bond ETF TLT posting a 3.4% total loss so far this year. The Vanguard Long-Term Treasury ETF VGLT is down 2.7% on a total-return basis over the same period.
As for rates in long-term U.S. government debt, the yield on the 10-year Treasury note BX:TMUBMUSD10Y rose Friday to 4.256% based on 3 p.m. Eastern time levels. The 10-year rate is up almost 40 basis points this year, despite retreating nearly 26 basis points so far in June, according to Dow Jones Market Data.
Bond yields and prices move in opposite directions. That has translated into a bond-market rally over the past month, with long-term Treasurys rising more than high-yield debt.
Shares of the SPDR Bloomberg High Yield Bond ETF have edged up 0.1% over the past month, trailing the 2.4% rally in shares of the Vanguard Long-Term Treasury ETF, according to FactSet data.
Meanwhile, shares of the iShares Core U.S. Aggregate Bond ETF, which tracks an index of investment-grade fixed-income assets that includes Treasurys and corporate debt, has climbed 0.9% in the past month.
That's slightly more than the 0.8% gain for shares of the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD over the same period - a fund that remained down around 0.5% so far in 2024 on a total-return basis through Friday, according to FactSet data.
Read: Why high-yield bond ETFs may deliver 'surprise' outperformance in fixed income in 2024
While junk bonds are outperforming this year, the heavier debt burdens of companies with below-investment-grade ratings make them more vulnerable during an economic downturn, when cash flows risk drying up.
Hertz Global Holdings Inc. $(HTZ)$ saw its below-investment-grade bonds sell off Thursday after the company warned of a bigger quarterly loss.
But bonds that are deep in junk territory, with CCC ratings, are by some measures still up this year on a total-return basis. For example, the BondBloxx CCC-Rated USD High Yield Corporate Bond ETF XCCC has returned a total of slightly more than 2% this year through Friday, according to FactSet data.
The U.S. high-yield market has been gradually deleveraging for the last several quarters, but "the distribution of deleveraging is uneven, as most of it is concentrated in the top-quality deciles," the BofA strategists said. "We continue to recommend gradual dialing down in credit risk."
-Christine Idzelis
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(END) Dow Jones Newswires
June 22, 2024 07:00 ET (11:00 GMT)
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