SPDR Barclays Capital High Yield Bnd (JNK) & iShares iBoxx $ High Yid Corp Bond (HYG): Why It’s Time to Drop Junk Debt

Refinance risk is exploding

Junk bonds in the Barclay’s High Yield Index, which the SPDR Barclays High Yield Bond ETF tracks as its underlying index, are shifting toward shorter maturities. The chart below demonstrates this changing tide:

Shorter maturities are the biggest risk to the high-yield market because companies will have to raise more capital more frequently to refinance existing debts. This exposes debtors to higher interest rate risks as well as refinancing risk. If a junk credit cannot refinance, it may not be able to pay upcoming maturities, leading to big defaults.

Once again, maturation is the biggest risk facing the junk bond market. Debts are easily rolled over into new junk issuance now that the appetite for junk debt is high. Should investors slow their desire to finance junk companies, however, the market will have to brace for a series of large-scale defaults. Easy credit doesn’t last forever – investors with junk bond exposure would be wise to exit before the rest of the herd. When junk bond yields are no longer attractive, wide-scale defaults will follow.

The article Why It’s Time to Drop Junk Debt originally appeared on Fool.com.

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