Junk bonds are also feeling the pain of the stock market

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A sense of risk aversion was set to overtake the junk bond market at some point, as major equity indices continued to see red. Gaining exposure to high yields was ideal in a low rate environment, but as yields continue to climb, bond markets have been in their own world of pain.

Of course, the riskiest bonds received a helping hand from the Federal Reserve at the height of the pandemic in 2020 to stave off a debt market meltdown. The Fed was quick to claw back risky assets to support the bond market, including high yield debt.

Now, as the Fed seeks to unwind its balance sheet, which includes those assets purchased during the pandemic, it could spell chaos for riskier bonds. It’s also forcing companies to roll back new deals as inflation fears and rising rates continue to rattle markets.

“Shockwaves from stock market declines are spreading to junk bonds, driving prices down and forcing some companies to cancel new trades,” notes a Wall Street Journal report. “Average U.S. high-yield bond prices fell to around 91 cents on the dollar on Monday, the lowest level since May 2020 when pandemic shutdowns hit the global economy, Bloomberg data showed.”

Mitigate the risks and shorten the duration

In today’s bond environment, earning a return may not be as difficult, but mitigating interest rate risk will require short-duration exposure. Yield and short duration are available in the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).

BSV seeks to track the performance of the Bloomberg US 1–5 Year Government/Credit Float Adjusted Index. This index includes a broad range of bond exposures, including all medium and large issues of US government bonds, investment grade corporates and international investment grade bonds denominated in dollars that have maturities between one and five years and are publicly issued.

BSV strengths:

  • Seeks to track the performance of the Bloomberg US 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
  • Invests in US government bonds, high quality (investment grade) corporate bonds and international investment grade dollar denominated bonds.
  • Follows a passively managed index sampling approach.

For more news, insights and strategy visit the Fixed income channel.

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