Biggest Junk-Bond ETF Suffers Stampede With Credit-Market Freeze
The freeze gripping international credit has spread to exchange-traded funds that track junk bonds.
(Bloomberg) -- The freeze gripping international credit has spread to exchange-traded funds that track junk bonds.
Investors have pulled over $4 billion from high-yield debt ETFs in the past week, after pouring about $13.4 billion into the funds in the last year, according to data compiled by Bloomberg. The biggest U.S. junk-bond fund -- BlackRock Inc.’s $15.2 iShares iBoxx High Yield Corporate Bond ETF, ticker HYG -- posted record outflows of nearly $1.6 billion on Tuesday.
U.S. junk-bond funds are on track to see their biggest outflows in more than six months as investors pull back from risky assets amid deepening concerns about the spread of the coronavirus and its economic fallout. The primary market was frozen for a third straight day on Wednesday as issuers assess volatility. Combined with rising risk premiums on U.S. junk bonds, ETF investors are tapping out.
Junk Bond Investors Run for the Exits as Virus Fears Take Hold
“We’re seeing a re-rating based on lower growth and earnings expectations in risk assets,” said Ed Al-Hussainy, a senior strategist at Columbia Threadneedle. “Many real money and hedge fund investors use ETFs as proxies for high-yield credit default swaps, and are legging out as risk volatility has picked up.”
It’s a remarkable turnaround from the start of 2020, when U.S. high-yield debt was on track for the busiest pace of issuance in a decade. Junk bond yields climbed for a fifth straight day to 5.62% in the longest rising streak since August.
In addition to pulling cash, investors are increasingly betting against junk-bond ETFs as well. Short interest on HYG has climbed in recent weeks to the highest since June, signaling that traders are bracing for more credit pain ahead.
While appetite for risky debt has soured, demand for haven assets remains strong. BlackRock’s iShares 3-7 Year Treasury Bond ETF and its 7-to-10 year counterpart both saw the biggest one-day inflow since September on Tuesday.
The cash influx came as benchmark 10-year Treasury yields plunged to an all-time low, and highlights the ongoing rotation in fixed-income assets, according to CFRA Research.
“Investor appetite for risk-taking has shrunk this week amid a flight to quality,” said Todd Rosenbluth, CFRA’s New York-based head of strategy. “They would prefer to hide in Treasuries and reemerge when there is greater clarity than seeking out higher income that comes with elevated credit risk.”
©2020 Bloomberg L.P.
