Credit Nerves on Show as Junk Fund Sees Biggest Exodus in Months

(Bloomberg) -- More than two weeks of doubt and volatility in the stock market are finally starting to show up in corporate bonds.

Investors fleeing the iShares iBoxx High Yield Corporate Bond exchange-traded fund (HYG), the largest ETF tracking U.S. junk debt, pulled $1.06 billion from the product on Monday, according to data compiled by Bloomberg. That was the biggest exit since the coronavirus-triggered selloff in February. At the same time, having shrugged off much of the recent equity turmoil so far, spreads on high-yield debt jumped by the most in three months.

The moves underscore the risk-off tone on Wall Street. Thanks to record low interest rates and a central bank backstop, credit rebounded from the March turmoil. But valuations are high, just as they are in the stock market, and it leaves little cushion for risk as virus fears return and an American presidential election nears. Dwindling hopes for another U.S. fiscal stimulus package by year-end combined with a still-nascent economic recovery are also fraying nerves in the sector.

“The drivers of the stock sell-off are also very pertinent for the high-yield space,” said Seema Shah, chief strategist at Principal Global Investors. “Economic distress, if it materializes, will inevitably impact the high-yield sector and investors are pulling back because of that.”

The eye-catching flow extends a poor run for HYG, which is on track for a fourth straight week of outflows. The ETF sank 0.8% to close at its lowest level since July on Monday.

Meanwhile, although investment-grade bonds held up slightly better, ETF investors were taking few chances. They withdrew $744 million from the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the fund’s worst day in more than a month.

©2020 Bloomberg L.P.