The weakness in the high-yield bond exchange traded fund space is being exacerbated by rapid redemptions. However, the problems seem to be confined to junk-rated corporate bonds for now as other areas of the fixed-income market remain relatively intact.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has dipped 0.7% over the past month while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) fell 0.8%. Year-to-date, HYG is up 4.3% and JNK gained 4.8%.
In the week ending July 23, investors pulled $441.5 million from HYG and $113 million from JNK. [Investors Getting Skittish With Junk Bond ETFs]
Lipper data revealed that junk-bond mutual funds and ETFs experienced $2.38 billion in net outflows in the week ended July 23, up from the $1.67 billion in outflows in the week prior, reports Michael Aneiro for Barron’s.
Bank of America Merrill Lynch credit strategist Yuriy Shchuchinov argues that the fund outflows are effect of the market’s poor performance.
“As flows typically follow returns, the outflows are likely a result of the selloff in high yield bonds so far in July, although valuations have rebounded somewhat last week,” Shchuchinov said in the article.
Barclays credit strategists Jeffrey Meli and Bradley Rogoff, though, argue that the high-yield bond market currently weakening because of the outflows in high-yield funds.
“The move in high yield has been driven in large part by significant outflows from high yield mutual funds and ETFs,” the Barclays analyst said in the article. “Outflows began in early July, with the High Yield Index yielding less than 5%, but continued even as spreads/yields backed up. Month-to-date high yield mutual fund outflows have totaled $3.8bn. Separately, high yield ETFs have seen $2.2bn of redemptions over the same period; for instance, total shares outstanding of HYG and JNK have declined 7% and 4% month-to-date, respectively.”
Nevertheless, Shchuchinov points to the targeted sell-off in the fixed-income market. Specifically, investment-grade and leveraged loan bonds have not affected.
“High grade bond prices are up this month on lower interest rates, and consistent with flows following returns, inflows to high grade have been very strong,” Shchuchinov said. “Last week high grade funds reported inflows of $2.14bn, which marks the fifth $2bn+ inflow over the last six weeks. The high grade inflows included a $0.74bn inflow to short-term high grade funds and a $1.40bn inflow outside of short-term funds.”
Over the past month, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) was up 0.2% and iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) gained 0.6%. Meanwhile, short-term bond ETFs, like the iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY) and Vanguard Short-Term Corporate Bond Index (NYSEArca: VCSH), were slightly higher over the past month. [Demand Favors Corporate Bond ETFs]
Additionally, the leveraged loan ETF, PowerShares Senior Loan Portfolio (NYSEArca: BKLN), which tracks speculative-grade securities, was up 0.1% over the past month.
“Unlike high yield, outflow from levered loan funds has remained subdued last week with a $0.26bn outflow, similar to $0.37bn outflow in the prior week,” Shchuchinov added.
For more information on the speculative-grade bonds, visit our junk bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of HYG and JNK.