Junk bond exchange traded funds are experiencing large outflows and are now testing their long-term trend lines as investors weigh this year’s rally against fundamentals and the economic outlook.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) was down 0.7% Friday while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) dipped 0.8%. Both HYG and JNK have declined 2.4% over the past month and are now testing their 200-day simple moving average. [Junk Bond ETFs Crimped by Outflows]
According to Lipper data, U.S. junk-bond funds experienced $1.48 billion in outflows this week, their third consecutive weekly decline, the Wall Street Journal reports. Investors have pulled over $5 billion from junk-bond funds and ETFs in July.
Fixed-income traders are growing skittish, betting on a quickening Federal Reserve monetary tightening schedule, which would diminish bond returns, in response to the better-than-expected U.S. economic expansion of 4% in the second quarter.
“The easy trade is over,” Alan Gayle, director of asset allocation at RidgeWorth Investments, said in the article. “It’s a trade-off between volatility and returns.”
Last month in the Senate, Federal Reserve Chairwoman Janet Yellen warned that valuations of low-rated corporate debt “appear stretched.”
Bond investors argue that current environment underscores the market’s vulnerability to rising rates after yields on major junk-bond indices touched record lows. Year-to-date, investors have jumped into speculative-grade corporate debt to capture higher returns, given the stubbornly low rates in the Treasuries market.