Junk Bonds Return to Favor as Risk Gauge Shows Confidence

The junk-bond market, which was rattled last month by its biggest slump in more than a year, is poised to recover its losses as demand resurfaces for riskier assets.

The risk premium on the Markit CDX North American High Yield Index, a barometer of credit-default swaps tied to the debt of 100 speculative-grade companies, dropped to the lowest level since July 25. BlackRock Inc.’s $12.5 billion exchange-traded fund that focuses on junk bonds reported its biggest weekly share creations since May in the period ended Aug. 15, according to data compiled by Bloomberg.

High-yield bonds, which had fallen 1.9 percent over a five-week period, according to Bank of America Merrill Lynch index data, have nearly recouped the losses this month as investors flock back to the debt. Signs of an improving economy and expectations that the Federal Reserve will take measures to prevent a selloff have pushed some of the biggest underwriters of the debt to vouch for junk bonds.

“The now-calmer market allows investors to return to the fundamental stories underlying their holdings,” Barclays Plc strategists led by Brad Rogoff wrote in an Aug. 15 report. “We remain positive on the market’s fundamentals, and a closer look at second-quarter results corroborates our view.”

The Markit high yield gauge dropped 8.7 basis points to 313.6 basis points at 3:56 p.m. in New York. That comes after the measure had climbed to a six-month high of 353.8 basis points earlier this month. The index typically rises as investor confidence deteriorates and falls as it improves.

Shares Created

BlackRock’s iShares iBoxx high yield corporate bond ETF reported the creation 3.7 million shares last week, following 3.6 million in the prior week. The rebound from four straight weeks of redemptions comes after retail funds reported a record outflow of $7.1 billion in the week ended Aug. 6, according to data provider Lipper.

The asset class will offer the best returns among fixed-income categories through the end of the year, Stephen Antczak, the head of U.S. credit strategy at Citigroup Inc. said in an interview last week. The Fed’s safety net remains in place and it will continue to subdue extreme volatility, he said.

JPMorgan Chase & Co., the largest underwriter of the debt, in an Aug. 8 report that it expects returns of 7.5 percent on the bonds. The securities have gained 5.2 percent this year through Aug. 15, Bank of America Merrill Lynch index data show.

ETFs trade like stocks, and shares can be created or destroyed to keep the price close to that for the holdings in the underlying investment portfolio. Junk, or high-yield, high-risk, bonds are rated less than Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Mitchell Martin, John Parry

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