Plunging Yields Send Junk Bond ETFs Soaring

Coming off a stellar 2012 that elicited ample bubble talk, high-yield bonds and the ETFs that hold those issues have continued climbing in 2013.

In broad terms, the U.S. high-yield debt market is up about two percent year-to-date. Record low yields are not keeping investors away. On Thursday, yields on U.S. junk bonds touched an all-time record low 5.626%, down from 5.658% Tuesday, Barron's reported.

Some companies, including Tenet Healthcare (NYSE:THC), have issued junk bonds this year with coupons below five percent. In other words, investors are accepting a lower spread on high-yield debt over Treasuries just to own junk debt. And some ETFs are benefiting.

Even with today's modest decline, the iShares iBoxx $ High Yield Corporate Bond Fund (NYSE:HYG) is flirting with $95. HYG, home to over $16.3 billion in assets under management making it the largest junk bond ETF, has not closed above $95 since June 2008.

Lower yields and reduced spreads over Treasuries apparently are not keeping investors out of HYG's primary rival, the SPDR Barclays High Yield Bond ETF (NYSE:JNK), either. Barring a disaster before the end of the day, JNK will likely close above $41 again. The last time the ETF had consecutive closes above $41 was in September 2008. The PowerShares Fundamental High Yield Corporate Bond ETF (NYSE:PHB) is also trading at its highest levels since September 2008.

The recent surge in high-yield debt prices also indicates reports of the diminishing assets from these ETFs were premature at best. In mid-November, HYG and JNK combined for $28.3 billion in AUM. At the start of trading today, the number was close to $29.3 billion.

Almost unnoticed, JNK's short duration cousin, the SPDR Barclays Short Term High Yield Bond ETF (NYSE:SJNK) continues to haul in assets at a jaw-dropping clip. SJNK, which will celebrate its first birthday in mid-March, had less than $669 million in AUM on January 9. That total was up to $774.1 million as of January 23.

Interestingly, just as the rally in U.S. junk bonds has its share of doubters and detractors, so does the surge in Asian high-yield debt. There are some signs Asian high-yield debt is ready to pull back. Earlier this year, investors put in an overwhelming $45 billion of bids for $1.75 billion of bonds offered by three junk-rated property firms from China, Reuters reported.

That could be perceived as signs of a bubble, but investors still have an appetite for Asian high-yield debt. The Market Vectors Emerging Markets High Yield Bond ETF (NYSE:HYEM) devotes about 26 percent of its weight to three Asian nations, with China being the fund's largest country exposure at 15.6 percent. HYEM had just $20 million in assets as of late November, but entered trading today with $38.1 million in AUM. HYEM tracks an index of dollar-denominated emerging markets corporate debt.

The iShares Emerging Markets High Yield Bond Fund (BATS: EMHY), which features a mix of public and private sector high-yield emerging markets bonds, also seen robust inflows. EMHY had less than $200 million in AUM at the start of this month, but that number is now over $222.6 million.

The Philippines and China combine for about 13 percent of EMHY's weight, but the fund features exposure to seven other Asian nations. As has been the case with HYG and JNK, folks can call for a bubble with ETFs like EMHY and HYEM, but that does not mean the bubble is imminent.

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