As Rates Tumble, Yield Hunters Pour Into Junk Funds: ETF Watch

(Bloomberg) -- With interest rates on a nosedive, exchange-traded fund buyers are increasingly plunging into the junk-bond market.

Last week, the yield on 10-year Treasuries topped 3 percent and then started tumbling, currently holding above 2.8 percent. Meanwhile, the largest junk-bond ETF -- the iShares iBoxx $ High Yield Corporate Bond ETF, ticker HYG -- took in more than $1.1 billion over the same time frame, its largest weekly inflow since December 2016.

“It may be as simple as the search for yield,” said Sean Simko, head of fixed-income portfolio management at SEI Investments Co. “If you feel corporate balance sheets are healthy, high-grade exposure provides an enticing risk return profile.”

As Rates Tumble, Yield Hunters Pour Into Junk Funds: ETF Watch

Other funds tracking junk bonds also brought in cash, said Christian Fromhertz, founder and chief executive officer of the trader education firm Tribeca Trade Group. The second-largest high-yield ETF -- the SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK -- had $410 million of inflows last week, while the iShares iBoxx $ Investment Grade Corporate Bond ETF, ticker LQD, and iShares JPMorgan USD Emerging Markets Bond ETF, ticker EMB, each took in around $350 million.

The action indicates “good breadth” and not just a “one-off inflow in HYG,” said Fromhertz, who uses fund flow data to gauge sentiment. In this case, the strength of junk could be a bullish indicator for stocks.

“As mostly an equity investor, it gives me kind of a warm and fuzzy feeling when the fixed-income flows indicate more of a risk-on tone,” he said. “I think of it really as positive sentiment for equities.”

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