Junk Bonds Continue To Lead US Fixed-Income Rally In 2019

Bloomberg’s Nir Kaissar is no fan of high-yield bonds. He warns that this slice of fixed income “is likely to be a drag on growth” for the risk portion of portfolios “while including them in non-risk undermines safety. Neither option is appealing.” Even worse, junk bonds don’t offer much diversification “because they’re highly correlated with stocks,” he charges.

The crowd, however, thinks differently, or so it seems, based on the recent love affair with junk. Or maybe the market is simply ignoring the caveats in pursuit of what’s considered easy money. Whatever the explanation, there’s no denying junk’s bull market of late. Indeed, high-yield securities continue to top this year’s rally among the major slices of the bond market, based on a set of exchange-traded funds through yesterday’s close (Apr. 26).

SPDR Bloomberg Barclays High Yield Bond (JNK) is up a sizzling 9.2% so far in 2019 (as of Apr. 25) — far above the 2.8% year-to-date gain for the broadly defined investment-grade market, based on Vanguard Total Bond Market (BND). The only slice of investment-grade bonds that comes close to JNK’s year-to-date surge at the moment: long-term investment-grade corporates via Vanguard Long-Term Corporate Bond (VCLT), which is up 8.5% this year.

In other words, the next best thing to matching junk’s rally this year has required going far out on the curve for maturities in corporates. Indeed, VCLT’s average effective maturity is nearly 24 years, according to Morningstar.com – far above JNK’s roughly 6-year average.

Longer term, JNK’s return premium holds up nicely, or at least it has for the current trailing three-year window. An investment in SPDR Bloomberg Barclays High Yield Bond three years ago would have popped 23%, well ahead of VCLT’s 15% and BND’s 6%.

In the longer term, it’s true that US equities have beat junk, but there’s room for debate about the diversification benefits for high-yield bonds. For perspective, let’s switch to a pair of mutual funds that offer 15-year track records. (JNK, by comparison, was launched in 2007.) Vanguard 500 (VFINX), an S&P 500 index fund, earned an annualized 8.6% over the trailing 15-year period, moderately higher than 6.3% for Vanguard High-Yield Corporate (VWEHX), based on Morningstar data through yesterday (Apr. 25).

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Disclosure: None.

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