(February 20, 2013) — Investors hungry for income in the low-return environment are still huddling into the riskiest form of corporate debt despite yields brushing record lows, data monitor Markit has found.
Exchange-traded products (ETPs) offering access to high-yield corporate debt markets have become the most popular debt funds amongst North American investors, Markit said this week.
At the last count, funds held $40.3 billion of assets invested in corporate bond funds, a jump of $1.2 billion for the-year-to-date. Of this total amount, high yield has been the most popular strategy holding $18.5 billion–over twice the amount invested in investment grade funds, which have $7.8 billion of assets, Markit said.
“The increasing popularity of high yield corporates is best highlighted by the falling yield demanded by investors in order to hold non-investment grade assets,” a note from Markit said today. “The Markit iBoxx Liquid High Yield index has seen its yield fall 74 basis points in the last six months and currently yields 5.8%.”
The current yield is up about 35 basis points from the all-time lows of 5.4% seen at the end of January.
“Also highlighting the popularity of high yield over investment grade bonds is the fact that investors now demand less of a risk premium to hold non-investment grade assets,” Markit said. “The spread of the USD Liquid High Yield iBoxx Index over the USD Liquid Investment Grade iBoxx Index has fallen by 70 basis points over the last six months.”
Short sellers are also very active in high yield ETPs with two funds making up two of the five most shorted ETPs by value. The iShares iBoxx High Yield Corporate Bond Fund has 10% of its shares out on loan, representing over 85% of assets available to short.
Of all the sectors in the bond market, it is in high yield where ETPs have the highest share, according to figures from BlackRock. However, this figure still stands at just 3%.
“Fixed income ETPs should be viewed as investor sentiment indicators rather than market forces as they are a drop in the bucket compared with the total value of bonds outstanding,” the asset manager said last week.