Buyers have been generally flooding the high yield corporate bond market recently, despite heightened fears about increasing defaults, credit rating downgrades, and fundamental concerns in the wake of the coronavirus crisis.

Since the Federal Reserve rolled-out massive measures in late March to help support the economy and financial system, the performance of certain high yield, fixed-income exchange-traded funds (ETFs) have turned decidedly positive.

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To date, shares of the iShares iBoxx High Yield Corporate Bond ETF (NYSEARCA: HYG), for example, have soared around 16.3% since hitting a low of US$68.63 on March 23, with assets having reached more than US$19.25bn. 

Similarly, prices on the SPDR Bloomberg Barclays High Yield Bond ETF (NYSEARCA: JNK) have increased about 16.35% over the same period to around US$98.40 intraday Thursday.

The lion’s share of the fixed-income securities underlying these ETFs are mainly U.S. junk bonds residing in the media, healthcare, telecommunications, and oil and gas sectors, and many in the market fret further COVID-19 inflicted downgrades and defaults will likely rise in at least some of these industries.

S&P Global Ratings recently noted that with the rapid spread of the coronavirus outbreak, and the effects on domestic consumption from the containment measures implemented to prevent it, potential credit rating downgrades on firms in the media and entertainment sector have risen.

Among the media-related, junk-rated issuers on its CreditWatch/Negative Outlook list are:

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Meanwhile, the dismal performance of the energy sector has also been blamed for rising default rates in the U.S. high-yield corporate bond market.

According to Fitch Ratings, oil-related industry defaults in 2020 could reach 17% by year-end, closing in on the record 19.7% mark set in January 2017.

Fitch recently noted that the trailing twelve-month (TTM) energy default rate stands at 9.9% following Whiting Petroleum’s (NYSE: WLL) bankruptcy, while several other companies could suffer “imminent defaults,” including:

Vine Oil and Gas; Chesapeake Energy (NYSE: CHK); California Resources (NYSE: CRC); Denbury Resources (NYSE: DNR); Unit Corp (NYSE: UNT); and Chaparral Energy (NYSE: CHAP).

Fitch added that the tally on its list of most concerning bonds has climbed to US$44.1bn from US$35.7bn in the prior month, with 60% of the volume comprising energy companies.

A slew of recent defaults across different industries have also hit the radar recently, mainly for missed interest payments, including Neiman Marcus, J.C. Penney, and Ultra Petroleum.

Meanwhile, recent performance of high yield bonds in the energy sector had dragged-down the overall market, with an aggregate widening of roughly 70 basis points to end last week, while year-to-date total returns languished in the area of -10%.

Nuveen analysts Bill Martin and John Miller observed that last week’s two major themes were a flood of primary supply totaling more than US$20bn, as well as “extreme volatility” in oil prices, including an unprecedented drop in West Texas Intermediate crude into negative territory. They added that trading volume was centered on recent new issues and fallen angels.

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However, despite the concerns about high yield corporate debt, new issuance has grown around 2.2% year-to-date in 2020 to over US$68.5bn, according to recent figures compiled by SIFMA, while funds continue to see massive inflows.

For the week ending April 22, Refinitiv U.S. Lipper Fund Flows reported net inflows of more than US$2.2bn into high yield funds, contributing to a two-week tally of roughly US$10bn.

Market participants generally foresee the Federal Reserve’s massive and numerous stimulus programs providing a boost to higher-yielding firms’ debt, as well as low-tier investment-grade debt on the cusp of junk.

Barclays strategists noted, for example, that the central bank’s assistance “should drive a rally in short-dated investment grade debt generally as well as the lower rated segments of BBBs,” while the “potential bright spot for high yield investors” is that the Fed can purchase high yield ETFs.

As of April 28, 2020, ‘BBB’-rated credits had narrowed by 4bps over a 10-day period to 309bps – and tightened by more than 60bps over the past 20 days. Still, the level remains a far cry from its post-2008 crisis low of 115bps, according to data compiled by Mischler Financial’s head of fixed income syndicate Ron Quigley.

In the meantime, high yield corporate bonds in the energy sector were outperforming Thursday with OAS spreads having narrowed 22 bps to about 1,395 bps, according to Bloomberg. High yield communications bonds, however, were 2.5bps wider on the day at 618.5bps.

Also in the intraday Thursday trading session, the HYG and JNK ETFs were slightly outperforming the market, each down around 0.6% on the day, while the S&P 500 was off more than 0.75%.