IInvestors showed renewed interest in high yield fixed income securities in the week ended July 8, even as Treasuries sold off in the face of stronger than expected economic data.
While rising yields across the curve have led to negative returns on high-quality credit, high-yield spreads have rallied, according to the latest weekly credit update and commentary from BondBloxx Investment Management. Yields on high-yield fixed-income securities reached 8.4% on July 8, well above those on investment-grade corporate bonds (at 4.8%). This tightening in high-yield spreads was led by the less credit-sensitive BB sector, resulting in a 1.6% return for BBs.
“With equities showing some respite in early July and inflation expectations falling sharply, people were ready to dive and take high yield risk,” said BondBloxx co-founder Elya Schwartzman.
Heavily indebted CCCs, meanwhile, lagged, returning 0.5% for the week. For the one-month period, BBs (-3.3%) are ahead of CCCs (-6.4%) by more than three percentage points. Schwartzman noted that while investors were a little adventurous with BBs, they weren’t as eager to dip their toes into CCCs.
“Economic growth expectations are still falling and so the near-term risk of defaults from cash-strapped companies is increasing,” Schwartzman said.
This rally in high-yield fixed-income spreads comes the same week as the June jobs report revealed that payrolls had exceeded estimates and unemployment remained low, cementing another rate hike of 75 points. basis by the Federal Reserve at the end of July.
With oil prices down from the peak in early June, energy lagged high yield last week, returning 0.7%, as TMT led the high yield segment, with a yield of 1.7%. While still leading for 2022, energy is now a month behind, down -5.1%, while consumer staples lead at -2.9% for the month.
Launched in October 2021 to provide precision ETF exposures to bond investors, BondBloxx Investment Management was founded by ETF industry leaders Leland Clemons, Joanna Gallegos, Tony Kelly, Elya Schwartzman, Mark Miller and Brian O’Donnell. The team has collectively built and launched over 350 ETFs in companies including BlackRock, JPMorgan, State Street, Northern Trust and HSBC.
Last month, BondBloxx launched the BondBloxx JP Morgan USD Emerging Markets 1-10 Year Bond ETF (XEMD)its 11th listing since February 2022, joining seven high yield sector ETFs and three new rating-specific ETFs listed in May. The company also filed a prospectus for a series of eight duration-specific T-Bill ETFs.
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