Investors are pulling away from high-yield, speculative-grade debt and related exchange traded funds as more focus on safety over income generation.
According to the Bank of America Merrill Lynch, investors have redeemed $2.7 billion from high-yield bond funds, the largest weekly outflow for the sector since August 2013, reports Andrew Bolger for Financial Times.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) both fell about 0.9% over the past week. HYG has a 4.25% 30-day SEC yield and JNK has a 4.73% 30-day SEC yield. [Bond ETFs: Risks in High-Yield Rewards]
“Recently it has been all about safety over yield and credit over equities,” analysts at BOFA said in the article, pointing to flows data that reveal investors heading toward high-safety markets.
High-grade bond fund flows have been on the rise. So far this year, investment-grade ETF inflows have increased five times that of high-yield ETFs.
Over the past week, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) is up 0.6% and Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) is 0.4% higher. LQD has a 3.1% 30-day SEC yield and VCIT has a 3.07% 30-day SEC yield. [Demand Favors Corporate Bond ETFs]
Investors are growing anxious over riskier debt after Federal Reserve chairwoman Janet Yellen warned about a sooner-than-anticipated rate hike. Additionally, geopolitical risk, notably a downed Malaysian Airliner in Ukraine and Israel’s push into the Gaza strip, have made more investor risk adverse.
While the BofA points out that the index of investor confidence indicates greater financial market greed than fear, the current level of bullishness is close to a level that could result in a contrarian “sell” signal.
iShares iBoxx $ High Yield Corporate Bond ETF
For more information on speculative-grade debt, visit our junk bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of HYG, JNK and LQD.