The cash outflows in the largest junk bond ETFs such as iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) have analysts wondering whether the pullback is a healthy correction after a strong rally, or a sign of something more serious in credit markets.
“The sudden downturn in high-yield corporate bonds should give investors a wake-up call,” writes Michael Kahn at Barron’s. “While it is not unusual for any market to pull back after a few months of strong gains, this market’s departure from other so-called ‘risk assets’ could be an early warning that the recent strong run in the stock market is in jeopardy.”
Also, some are questioning whether the soaring popularity of corporate bond ETFs could facilitate a violent downturn if investors rush for the exits at once as interest rates rise.
“[M]utual funds and ETFs together are responsible for a big portion of the marginal flows into corporate credit markets in recent years,” writes Matthew Boesler at Business Insider, citing research from Citi strategist Stephen Antczak. “Mutual funds now account for $1.7 trillion of the market, up 69% from the first quarter of 2009, and ETFs are responsible for $200 billion – up 328% in the same time period.”
The iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG) and SPDR Barclays High Yield Bond (NYSEArca: JNK) recorded net outflows of $460.9 million and $347.5 million, respectively, amid last week’s sell-off, and trading volume has been rising. Still, the outflows aren’t significantly large when considering how big these ETFs are, and the massive inflows they’ve attracted over the past year from yield-hungry investors. [High-Yield, Emerging Market Bond ETFs Lead Outflows on Pullback]
Corporate bond mutual funds and ETFs have allowed individual investors to easily access the sector. If Treasury yields rise this year and hurt the corporate debt market, these investors could scale back, “creating forced sellers,” Antczak notes.
“Forced selling is a problem when there is no one else to take the other side of the trade. Making the situation worse is the amount of risk investors in corporate credit have taken on as of late,” Boesler writes at Business Insider.