Koesterich Neutral On Junk Bonds (HYG, JNK)

In a recent blog post, iShares Global Chief Investment Strategist Russ Koesterich said he is neutral on high-yield bonds. Koesterich notes junk bonds "are close to fair value" and he recommends that "investors generally maintain a benchmark weight,"

. Despite some controversy,

. In addition to being a favored asset for income investors, junk bond ETFs have also been solid performers in 2012. The iShares iBoxx $ High Yield Corporate Bond Fund

, the largest high-yield bond ETF, is up almost two percent year-to-date while the rival SPDR Barclays Capital High Yield Bond ETF

is up nearly 2.7 percent. The SPDR Barclays Capital High Yield Bond ETF is the second-largest high-yield bond ETF behind HYG. Those year-to-date performances may not speak to Koesterich's assessment of high-yield bonds being close to fair value, but HYG and JNK have surged in the past month, perhaps indicating there is something to be said for these funds nearing frothy prices. Since June 5, HYG has jumped 5.4 percent while JNK has added 4.7 percent. Koesterich did say there are three instances in which he would advocate investors take an aggressive view of high-yield bonds. One scenario would be if spreads between junk bonds and 10-year Treasuries widen. "Assuming no further deceleration in the US economy, any further widening of high yield spreads back toward a premium of 650 to 700 basis points over the 10-year Treasury would represent a good buying opportunity, especially considering that many corporate balance sheets generally have been extremely strong and default rates have been low," Koesterich said in the blog post. Second, investors with high income needs should consider junk bonds, Koesterich said. He notes conservative investors may want to hold just 10 percent of their fixed income portfolios in high-yield bonds, but those "willing to take incremental risk to earn additional income may want to consider holding as much as 30 percent of their fixed income portfolio in high yield." Finally, Koesterich said investors that are concerned about rising interest rates "may also want to add high yield as a substitute for long-dated Treasuries." Junk bonds are less sensitive to even small changes in interest rates than long-dated Treasuries as junk issues typically have lower durations. HYG, which currently yields seven percent, has an effective duration of just over four years, according to iShares data. JNK, which yields almost 7.4 percent, has a modified adjusted duration of 4.32 years, according to the SPDRs web site. For more on junk bond ETFs, click

.