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Email this10:07 pm
December 21, 2018
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Are high yield bond ETF's safe from interest risk?
Example: short term / long term bond ETF's and Bonds available at this point in time are all generally yield near the federal fund rate (1.75%). So if rates increase they are quickly passed and less valuable.
However high yield bonds ETF's (NYSE:JNK) have yields much higher than the federal fund rate (assuming these underlining bonds generally yields of 4 to 8%+) So if interest rates go up they are not really affected (or as much). I understand they would be if interest rates skyrocketed and/or surpassed the yields of bonds inside JNK.
Is this a correct understanding?
5:15 am
September 11, 2013
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Not my understanding, in fact "junk" bonds might react even more adversely than "quality" bonds to interest rate increases if investors saw that as an indicator of rising inflation or other economic troubles. I don't trade or invest in bonds, aside from within some balanced mutual funds, so I'm certainly no expert on this.
6:54 am
January 23, 2013
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I think "Duration" the one you need to look at. It is considered as interest sensitivity and, roughly speaking, if interest changes 1%, the price will change 1% X Duration. (e.g if duration is 3 (years) interest up 1%, the price will down 3%).
Though, Junk bond may affected by other factors more than interest change.
8:52 am
October 29, 2017
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Interest rates aren’t going up anytime soon. They may go down though.
2:06 pm
April 6, 2013
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The short answer is no, junk bonds are not safe from interest rate risk.
Junk bonds are not as sensitive to interest rates because of their higher coupon. The higher coupon results in a lower duration number. That's not unique to junk bonds.
5:37 am
March 30, 2017
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All non govt bonds yields are the sum of GOC (government of Canada) yields + yield spread for the issuer name. Better credit quality names (banks etc) will have a tighter yield spread compare to lesser names. If you define the yield spread as a pure credit risk, then a high yield bond will track the move of GOC if credit spread remains constant. However as GOC yield comes down, the hunt for yield may push credit spread lower as well, which results in a bond rally (price, not yield). On the other hand, if the GOC yield comes in cuz its a flight to quality, then expect credit spread to widen, which will offset the drop in yield on GOC.
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