Junk Bond ETFs Fall to Lowest Level Since 2009 as Oil Drops

Exchange-traded funds that hold U.S. junk bonds dropped to their lowest levels since 2009 as the global growth fears that clobbered stock markets also raised doubts about whether companies’ would continue to generate as much cash to pay their debt obligations.

Energy companies’ bonds were hit hardest as oil prices fell to $29.73 a barrel, a 12-year low. Risk premiums on bonds in the sector -- a measure of the extra yield that investors demand for holding companies’ credit risk -- widened by 0.12 percentage point for investment grade credit, and 0.58 percentage point for junk bonds.

“If you start to see signs of distress outside of energy and natural resource companies, that’s trouble,” said Russ Koesterich, global chief investment strategist at BlackRock Inc. “That’s something you have to watch.”

BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund declined to its lowest level since mid-2009, when the global financial system was slowly pulling out of the worst of the financial crisis. The SPDR Barclays High Yield Bond ETF also fell to its lowest level since mid-2009.

Falling commodity prices lifted credit fear gauges to their highest levels in three years. The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, jumped 0.29 percentage point to 5.55 percentage points at 4:38 p.m. in New York, the highest since November 2012. A similar measure for investment-grade debt rose 0.063 percentage point to 1.1 percentage points, a three-year high.

Lower oil prices helped drag down the Standard & Poor’s 500 index to its lowest level since August 25, leaving the index down 12 percent from its May record. It is the worst start to the year for the index on record.  

Some investors wonder if it makes sense to start buying corporate bonds after a rough start to the year for the sector.

"I think people are taking it too far," said John McClain, a portfolio manager at Diamond Hill Capital Management Inc., in Columbus, Ohio, which oversees about $17 billion. “This is what it feels like when you are about to make a lot of money. You’re on a boat, there is a bad storm, you are rocking back and forth with the waves, you just have to make sure you can hold on and ride it out," he said.

Investors should begin compiling a "shopping list" so that they are ready to buy when markets become even more attractive, according to Kristina Hooper, a U.S. investment strategist at Allianz Global Investors in New York.

For now, though, some cautioned that macro factors will continue to weigh on investor sentiment.

"Until the macro headwinds subside, credit -- particularly high-yield credit -- will get dragged down along with the Shanghai Composite, the Dow Jones and the S&P 500," said Keith Bachman, the head of U.S. high yield at Aberdeen Asset Management Inc. in Philadelphia.

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