SHYG ETF: The benefits of reflectivity also mean more duration risk

iShares 0-5 Year High Yield Corporate Bond Fund (NYSEARCA:SHYG) is a medium-duration, high-yield ETF focused on the US corporate market. We had strong concerns about persistent inflation in the US in our last report coverage, and it more or less worked out as we expected, including the limited performance of ETFs. We continue to see a lot of the same dynamics, which puts any duration at risk. However, we want to highlight the reversal benefits, as unreasonably high demand for high-yield corporate debt appears to solve the maturity wall problem. But by solving the credit problem, it increases the likelihood of the duration problem occurring.

SHYG breakdown

Most of the bonds in this ETF are either B or BB rated, and the effective duration is 2.35 years. That’s all we really need to know from A Technical point of view. The expense ratio is 0.3%well below the category averages, as iShares ETFs typically have better expense ratios over fixed-income ETFs.

We still believe in going higher for a longer period. While there are signs of the job market slowing in some aspects, expectations are still ahead of expectations in jobs added. Wages continue to rise and unemployment remains below 4%. CPI data will be released on Wednesday, and there is no doubt that it will be above 3% in our view. The reflection and reason for this conviction is inflation expectations that remain above 3% on an annual basis even on a 5-year extended basis. Interest rate cuts will likely not happen this year unless what’s left of the crumbling entitlement wall has a real impact on employment numbers.

The thing to comment on is credit spreads. There is an argument that credit spreads are too low for this risk category considering there is no end to inflation in sight, and the need for higher interest rates for a longer period to combat it, which will have a greater impact on high-yield lenders. From low-yield lenders.

Low credit spreads caused by too much primary market demand for high yield issues may indicate a crowded trade, but the benefits of reversibility apply. Abstractly speaking, any security whose quality is linked to its position in the capital markets is reflexive, exaggerating the effect of upward and downward movement in the security because it affects the fundamentals of the security. In the case of SHYG, the maturity walls of the high-yield market are broken, making its regulated operation more likely. This protects the economy from shocks and resulting unemployment, which also protects the credit standing of high-yielding demand-side companies. This is a positive and mitigating factor for the main idea that risky credit is overvalued.

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You simply need unemployment to stop inflation. Whether or not that will cause a recession may be determined by Arrow’s Law, if you believe the rules of data mining, which raises a recession flag if the average unemployment rate rises by half a point above the lows of the past 12 months. If you still believe in soft landings, which we hesitate to believe, you can use this.

However, inflation is showing no signs of declining yet. The causes of inflation are still in full force. The duration remains unattractive, even if Just Two years or so for SHYG. While reversibility suggests credit spreads may be less worrisome, maturity walls and a wave of bankruptcies were one of the few ways we could envision an impact from higher interest rates dealing a hard blow to inflation. If this does not happen eventually, it will only prolong the inflation battle, and it appears that historically low credit spreads are already calculating the reversal benefits. Overall, SHYG is not a suitable option for us now.

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