ADVERTISEMENT

Junk-Bond ETFs Are Faring Better Than Treasuries

Junk-Bond ETFs Are Faring Better Than Treasuries

(Bloomberg) -- In a sign of how topsy-turvy financial assets are right now, risky high-yield bond ETFs have become relative havens and investors are fleeing government debt funds as fast as they can.

The $16.9 billion iShares 20+ Year Treasury Bond ETF, ticker TLT, has slumped more than 15% since March 9. That’s sent it to a 1.7% discount to its net asset value on Wednesday -- a chunky gap for a fund that historically has barely budged from the price of its underlying debt.

Meanwhile, the world’s biggest junk-bond product -- BlackRock Inc.’s iBoxx High Yield Corporate Bond ETF, ticker HYG -- is down 10% over the same period. While the fund traded with a 1% discount last week, it now actually holds a modest premium to the value of its assets.

Junk-Bond ETFs Are Faring Better Than Treasuries

The divergence highlights how safe assets are starting to become unmoored from their traditional roles in portfolios, roiling exchange-traded funds in their wake. While havens initially staged a historic rally amid deepening fears about the coronavirus’s economic impact, that quickly reversed as a funding squeeze gripped global markets.

Treasuries sold off, with investors shedding even their highest-quality holdings in an effort to raise cash. TLT was swept up in the rout, losing a record $1.8 billion on Wednesday. Assets that aren’t as easy to unload -- such as high-yield bonds -- haven’t suffered the same fate.

“You get into illiquidity, where it’s almost impossible to sell it, to find a buyer,” said Charles Schwab Corp. Chief Fixed Income Strategist Kathy Jones. “People start selling what they can sell, what they can find a bid for, and they can always find a bid for Treasuries.”

Longer-dated U.S. government debt has been particularly hard-hit in this latest market rout. Yields on 10- and 30-year bonds surged by the most since 1982 on Tuesday following Treasury Secretary Steven Mnuchin’s proposal for a $1.2 trillion stimulus package.

Junk-Bond ETFs Are Faring Better Than Treasuries

That pain has spread to investment-grade corporate bonds, with the $28.2 billion iShares iBoxx $ Investment Grade Corporate Bond ETF, ticker LQD, dropping 15.7% in the past week and a half.

High-quality credit tends to broadly track price action in the $16.9 trillion Treasury market, while junk-bond prices are more intimately linked to issuer actions, according to UBS Global Wealth Management’s David Perlman.

“There’s more credit risk with high yield corporates than with investment grade corporates,” said Perlman, an ETF strategist. “There’s more idiosyncratic drivers as opposed to investment grade, and those higher-quality assets which will be much more tied to movements in Treasuries.”

Interest-rate risk also plays a role. Duration -- a measure of sensitivity to rate changes -- tends to be lower in the biggest junk-bond ETFs. Higher duration exacerbates price declines when yields jump. HYG’s measure is around 4.4 years, while for TLT it’s 16.9 years.

Fund flows show the antipathy investors have toward duration. Besides TLT’s record one-day withdrawal, HYG is on track to take in roughly $852 million this week. ETFs that track the shortest end of the Treasury curve are heading toward their best month ever.

“I think it’s people freaking out, not wanting to take any type of duration at all,” said Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence. “Just judging by the flows, no one’s touching long-term right now.”

©2020 Bloomberg L.P.