Short Term High Yield An Interesting Opportunity

 I have written before of the advantages of short term high yield bonds over longer term bonds and the advantages of the yield spread  of high yield over investment grade corporate bonds and Treasuries of the same maturities..

In the past I have written about the actively managed ETF HYLD and the passively managed SJNK. Despite its higher yield  HYLD had extensive underperformance in 2014 vs SJNK due to its relative high weighting in energy related bonds as oil declined precipitously to $40. In 2014 HYLD had a total return of -13.6% vs -1.3% for SJNK. SJNK well outperforms HYLD over 5 years as well

Over longer periods investors in high yield have been compensated for the higher credit risk in those bonds despite higher volatility. Chart below shows the growth of $1 for High Yield, Aggregate Bond, Aggregate Corporate Bond, and Aggregate US Government Bond Indices.

High Yield (green), Investment Grade ( Red ) Aggregate Bond (blue) Treasyrt Bond (Gold)

Shorter term high yield bonds should have lower risk in terms of exposure to changes in interest rates (lower duration) and in terms of credit risk (less time before maturity for the corporation to eneter into default and closer date to redemption of the bonds) than longer term high yield bonds  As a consequence of this lower risk investros would be expeted to receive a lower yield.

Although we don't have a long history of yields for the short term high yield ETF (SJNK we can see that recent developments in the yield differential between short and longer term high yield bond etfs seems to show a bit of an anomaly.). As  t can  seen from the chart below this is the first time the yield on SJNK now trades at a minimal yield difference to JNK (only 8 basis points lower) the lowest since the sjnk has traded.. The chart below is from ETF replay. The website of the issuer state street lists the 30 day SEC yield of 4.96% for sjnk as vs for  5.01% JNK

SJNK (blue)  JNK (Gold)

Ishares also has a combination of a longer term high yield ETF (HYG) and a shorter term (SHYG) although the latter has a far shorter history and less assets than SJNK. The yield differential there is actually positive in favor of the short term ETF based on the chart below. The website of the issuer ishares has the 30 day sec yield of both shyg and  shyg at 4.80% and shyg at
The ETF.com charge has slightly different yield numbers but the trend is the same

SHYG (blue) HYG (gold

It is hard to explain what can only be seen as an anomaly one possibility is that there is simply mor demand for longer tem etfs than shorter term Jnk has $11.69 bln nd HYG the other major junk bond ETF has $18 bln SJNK has only 4.4 billion.

A Barrons article on subject cites Martin Fridson one of the most experienced analysts of the bond market:

In general, his research shows short-term high yield may be superior to longer term. He compared junk bonds maturing in one to three years with ones maturing in seven to 10 years going back 20 years, and found the short-term basket had an 8.51% average annual return while the long term had a 7.14% return.

“You’re getting more yield and, over time, higher returns in the short basket, but with greater credit risk,” says Fridson. However, the returns of the shorter-term junk bonds are less volatile. His conclusion: “It’s hard to argue against the short-term high-yield ETFs, based on the evidence.”

He explains the higher credit as follows

Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors, says short-term high-yield bonds often yield more than long-term ones because of the risk that a company won’t be able to refinance rises as maturity dates approach. Nonetheless, short-term high-yield bond indexes have outperformed longer-term bond indexes in recessions. “Bonds of selected issuers may do worse in the short end of the maturity scale than in the long end, but with a diversified portfolio, you should expect to do better in a recession,” Fridson says.

The logic of the above escapes me. If the company tha has issued the short term bonds has problems refinancing it doesnt at all mean it will default on the maturing bonds. And any risks related to the refinancing issue he cites should be far smaller than the long term credit risk involved in the longer maturity high yield bonds, And this is indeed reflected in the ield curve of high yield bonds which is upward sloping bth reflecting interest rate and credit risk.