Oil Prices Could Be Problematic For These Bonds And ETFs

February 24, 2016 9:35 am
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Oil Prices Could Be Problematic For These Bonds And ETFs

When it comes to low oil prices being problematic for parts of the fixed income universe, high-yield corporate corporate bonds are the epicenter of that discussion. With the US now being a major oil producer, some municipal bond issuers and the corresponding exchange traded funds could be pinched.

Conversely, the flight to safer assets and diminishing concerns about the Federal Reserve's interest policy is boosting ETFs such as the Market Vectors High-Yield Municipal Index ETF (NYSE: HYD). HYD, the largest high-yield municipal bond ETF, is up nearly one percent this year.

"Local and state municipal bonds issued within states dependent on oil production are potentially in a cycle where they could underperform the overall bond market. So far, modestly higher yields can be seen in Louisiana and North Dakota and only Louisiana has underperformed to any significant degree year-to-date.  Supply and demand of the bonds themselves plays an important role here as some states do not issue bonds in large volumes or have state supported debt," said S&P Dow Jones Indices Global Head of Fixed Income J.R. Rieger in a recent note.

Related Link: Sovereign Wealth Funds Might Be About To Unload If Oil Stays Low

Texas, the largest oil-producing state, is HYD's fourth-largest state exposure at 8.2 percent of the ETF's weight. Texas, the second-largest states behind California in economic heft and population, has a diverse economy, but massive layoffs throughout the energy industry could be a problem for areas such as Houston.

Louisiana is 2.5 percent of HYD's weight, making it the ETF's 11th-largest state exposure. Nine other states and territories are found on HYD's roster before getting to "other." "Other" could include Alaska and North Dakota. Even if it does, it is likely those states are scant percentages of HYD's weight.

HYD, which carries a four-star Morningstar rating, has a 30-day SEC yield of about 4.3 percent and an effective duration of almost 10 years. The ETF holds 1,344 bonds.

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