The quest for yield

Fed up with ridiculously low yields on T-bills? It seems a few of BNN’s regular guests are and have been turning their attention to the high yield bond market or junk bonds. For the past few months, Tyler Mordy, director of research with Hahn Investment Stewards has been advising clients to put money in the PowerShares High Yield Corporate Bond ETF (PHB-N).  This fund holds bonds in high yield or so called ‘junk bonds’ of U.S. corporations. The default risk is higher than government debt, but default rates have been falling says Mordy and with a 6-percent yield the risk/reward profile is attractive.

Philip Petursson, managing director, portfolio advisory group with MFC Global Investment Management has also been increasingly investing in U.S. junk bonds. The spread between zero risk T-bills and U.S. junk bonds is running around 650 basis points which is attractive, says Petursson. Won’t junk bonds get punished if interest rates go up? Not necessarily, says Petursson. Unlike triple-A rated corporate bonds, junk bonds trade more like equities -- trading on the fundamentals of individual companies and the overall health of the economy, rather than the direction of interest rates, he says.

Looking for a way to invest in Canadian junk bonds? Last week iShares debuted a new ETF called the Hybrid Bond Index Fund (XHB-T). It holds some high yield Canadian bonds but most of the holdings are actually investment grade long bonds. Oliver McMahon, director of product management with iShares Canada ETFs says the Canadian high yield market is tiny compared to the U.S., so creating an ETF that held only high yield debt isn’t practical. At least not right now.

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