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.
Exacerbating the sell-off in junk bonds, global equities markets faltered on weak corporate earnings and pessimistic news, notably from increased sanctions in Russia and default concerns in Portugal.
“There is not much of a cushion of yield to protect investors from an increase in volatility,” Chris Iggo, chief investment officer of AXA Investment Management’s fixed-income unit, said in the article.
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 and JNK.