Junk-Bond ETF Suffers $3.7 Billion Exodus With Election Looming

(Bloomberg) -- In the final countdown before the U.S. presidential election, exchange-traded fund investors are pulling out of junk bonds.

BlackRock Inc.’s $23 billion iShares iBoxx High Yield Corporate Bond ETF (HYG) had its worst week of outflows since the coronavirus-induced selloff in February, losing almost $3.7 billion, according to data compiled by Bloomberg. Meanwhile, the $6.5 billion Xtrackers USD High Yield Corporate Bond ETF (HYLB) posted its largest daily withdrawals on record.

The exodus comes as virus cases spike across the U.S. and Europe, prompting fears of renewed lockdowns that could imperil a fragile economic recovery. Investors across asset classes are bracing for a surge in volatility, fueled by a contentious American presidential election on Tuesday. Several borrowers in the high-yield market have shelved deals recently, while others have decided to sweeten the terms.

“It would be raising cash, it would be fear that you would see spreads widening, it would be fear of Covid pushing us into a lockdown or restrictions even if they were not federally mandated,” Quincy Krosby, chief market strategist at Prudential Financial, said, referring to the outflows from junk bonds.

State Street Corp.’s $11.8 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK) has seen three straight weeks of outflows, totaling more than $1 billion.

Short interest on HYG -- a rough indicator of bearish bets -- is about 18% of shares outstanding, according to data from IHS Markit Ltd. That’s up from less than 2% in August.

“Those assets are going to be more sensitive to the health of the recovery,” said Brian Nick, chief investment strategist at Nuveen, the investment arm of retirement-savings giant TIAA. “That’s some of what you were seeing, perhaps pre-election de-risking in combination with a little cloudier view of what the near-term pace of the economic recovery is going to look like.”

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