Click to Enlarge Everything bearing a higher-than-average coupon when compared to the 10-Year Treasury note is getting taken to the woodshed. Thus, now is the time to monitor high-yield bond ETF prices closely so that an allocation opportunity doesn’t pass you by.
Spreads are gyrating all over the place, and if you have lightened up on your exposure during the past several months (or didn’t have any to begin with), you should be paying very close attention to what happens next. I am watching the 5%-5.5% spread level closely. Assuming Treasuries stay over 2%, I think that level would present investors with a good intermediate-term buying opportunity.
With yields becoming more attractive by the day, securing an income stream above 5% at an attractive price should be a priority for every investor. Like many other risk assets, the most opportunity lies when markets fall to desperate extremes. To prevent making a large, ill-timed purchase, I recommend picking the ETF you want to build a position in, then spreading your purchases out over time during the course of the correction. This way, you will be able to average in an attractive cost basis.
My favorite ETF for this category is PIMCO 0-5 Yr High Yield Corporate Bond ETF (HYS). It carries much lower duration and therefore less sensitivity to interest rates than many other popular high-yield ETFs, but it doesn’t have a significantly lower yield.