2020 has been a historical volatile year for high-yield bonds even more than equities. The high-yield bond market crashed 23% in a matter of days in March and saw yields rocket to over 6%. Since then, the Federal Reserve has increased support for recently downgraded “fallen-angel” bonds which has caused most to climb back to historically low dividend yields.

The Fed’s support of below-investment-grade bonds creates a bit of a conundrum in markets. On one hand, there is a supply of money that can support the market if it drops again. On the other, the promise of support has caused risk premia to decline tremendously, causing junk bonds to be priced like higher-quality bonds during a generally poor economic environment. If it were not for belief in this support, junk bond ETFs like (HYG) would likely be trading at least 10-20% lower.

Importantly, that support will phase out as the Fed’s aim was to purchase recently downgraded ‘fallen angels’. Today, they’re really not buying any high-yield bonds. If the bonds in HYG continue to downgrade, they are unlikely to see any Federal Reserve support as they are all already non-investment-grade. This means that if there is another market sell-off, HYG will likely decline far more than it had in March. Quite frankly, the fund could see a 20-40% decline as it had in 2008. See below:

Chart
Data by YCharts

As you can see, junk bond yields are at an all-time low today despite the highly uncertain economic and political environment. This makes the ETF very risky, and as I’ll demonstrate, a crash in junk bonds may be the most likely scenario.

Low Maturity is A Double-Edged Sword

HYG’s weighted-average maturity length is much lower than normal at 3.9 years. This means that, on average, bonds in HYG must be refinanced

Kroger employees from across Southeast Texas gathered in front of the Dowlen Road store in Beaumont on Tuesday afternoon to urge public support for its contract negotiations with the company. The union seeks a return of pandemic hazard pay and a halt to potential changes to health care plans.

United Food and Commercial Workers Union Local 455, which represents 28,000 members in parts of Houston, all of Southeast Texas and parts of Louisiana, has been organizing demonstrations at stores in its coverage region since late September as negotiations with Kroger have become more heated.

Labor groups have been calling for the return of hazard benefits that Kroger awarded employees in March, such as a $2 pay bump, since the company ended its “hero bonus” in June. Focus has now shifted to a proposed increase in hours before employees could qualify for health insurance.

The company has also proposed a change to the structure of the trustee system for its insurance plan that would remove union representatives, according to UFCW leadership.

Rosalie Lowe, a lead at the floral department at the Kroger store in Orange, said the end of hazard pay and fear about changes to health plans have not been good for the moral of workers interacting with the public every day during the pandemic.

“We feel kind of betrayed,” she said. “I used to love to go to work. Now, I can’t look forward to it knowing what we mean to the company.”

After Kroger reported in June that it had a 19.1% growth in sales in the first fiscal quarter of the year, due in part to a more than 90% increase in digital sales, Lowe said employees can only assume that the company is going forward with changes for additional profit.

The company has reported that it