(MarketWatch) It’s party time for exchange-traded funds that track debt-laden U.S. companies.
Holdings of ETFs that reference junk-rated corporate bonds soon could top the existing $52.7 billion record set in October 2017, according to Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors.
Bartolini said that a heavy $4 billion of inflows in June helped boost junk-bond ETF holdings to within a few billion dollars of their all-time highs, and he expects more inflows in anticipation of possible Federal Reserve rate cuts later this month.
“It isn’t lock, stock and barrel into equities,” Bartolini said of the spike in interest for riskier assets in an interview with MarketWatch. “Investors are also using high-yield as a stock-replacement strategy to buy this rally.”
FactSet data shows the current holdings of 41 junk ETFs it tracks now total $46.65 billion. But the lion’s share is held by two ETFs, the iShares iBoxx $ High Yield Corporate Bond ETF and the SPDR Bloomberg Barclays High Yield Bond ETF which currently hold a combined $28 billion.
U.S. stocks were lower on Wednesday, but the Dow Jones Industrial Average Index, S&P 500 index and Nasdaq each have reset higher, multiple times in recent weeks.
The major stock benchmarks have returned around 17%-24% since the start of the year, according to FactSet data.
Yet, some of that upside has been powered by stock buybacks, which proliferated in recent years and are beginning to worry investors.
Junk-bond yields, while higher at 6.48% on Tuesday, were still hovering near recent lows of 6.36%, according to JPMorgan data.
That sort of compression worries veteran bond investor Dan Fuss, who told MarketWatch in a recent interview that credit spreads for high-yield bonds remained too tight given that another flare-up in trade tensions could still come back into play.
Some high-yield bonds in Europe recently have joined the roughly $13 trillion universe of assets now offering negative yields. But investors in the U.S. high-yield market can still find equity-like returns, but with lower volatility and 5.5% coupons, according to Bartolini.
“You have massively accommodating central banks around the world that are driving investors into risk assets,” he said. “And high-yield is one of those asset classes.”
