Nearly $1 Billion Flees Third-Largest Debt ETF

(Bloomberg) -- First, it was emerging markets. Then U.S. stocks. Now the flight from risk is spreading to bonds.

The latest victim: an exchange-traded fund that invests in high-quality corporate debt. BlackRock Inc.’s iShares iBoxx $ Investment Grade Corporate Bond ETF, better known as LQD, has lost $994 million over the last two days, data compiled by Bloomberg show. On both Wednesday and Thursday, the fund, which is the third-largest bond ETF in the world, saw the most outflows since February’s vol-pocalypse.

Markets have been roiled this week by a selloff in developing-nation assets and a ratcheting up of trade tensions, as President Donald Trump looks beyond an agreement with Mexico to penalizing China and reviving a battle with the European Union. But debt investors seem to be reacting to events closer to home. The Federal Reserve has repeatedly indicated that it’s on track to hike interest rates another two times this year, damping the appeal of longer-term corporate debt.

“It’s a lot, especially for as slow as it’s been in the last week of August,” Mohit Bajaj, director of exchange-traded funds at WallachBeth Capital, said of the outflow. “Rising rates don’t bode well for higher-duration funds, plus we’re going into month-end reallocations so probably people are shifting to more conservative instruments as we begin the fall.”

BlackRock declined to comment on the move.

Investors are buying short-term bonds via funds such as Pacific Investment Management Co.’s Enhanced Short Maturity Active ETF, or MINT, as well as Treasury inflation-protected securities, according to Bloomberg data. They may also be increasing their cash positions ahead of new bond issuance in September.

The Pimco fund, which has absorbed more than $200 million this week, is currently allocated most heavily toward bonds with maturities of up to one year, unlike LQD, which holds more debt that matures in 10 years or longer. Meanwhile, BlackRock’s iShares TIPS Bond ETF, or TIP, is poised for its best week since February.

To contact the reporter on this story: Rachel Evans in New York at revans43@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner, Andrew Dunn

©2018 Bloomberg L.P.