Investors hightailed out of speculative-grade debt this week, yanking almost $1.9 billion from junk bond funds as the rout in the energy market deepened. However, high-yield bond exchange traded fund investors seem less pessimistic.
In the week ended December 11, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) attracted net inflows of $26.9 million while the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) brought in $128.9 million, according to ETF.com data.
The $1.9 billion outflow from junk bond funds, though, is the largest weekly drop since the $2.3 redemptions in the week ended October 21, reports Katy Burne for the Wall Street Journal. According to Barclays PLC, investors are dumping junk bonds at their fastest pace in 18 months.
Market observers believe that the sudden fall in oil prices and perceived weakness in the energy sector is exacerbating a sell-off in junk bond mutual funds that are trying to raise cash to meet redemptions.
The corporate borrowing spree left some areas of the market vulnerable, namely junk bonds exposed to the energy industry. The U.S. shale oil boom has been fueled by heavy borrowing, with many companies highly leveraged as they expand drilling operations. With crude oil hovering around $60 per barrel, the lowest in five years, many of these companies will find it harder to repay their debt obligations.
“Energy is falling out of bed and will drive the entire market lower,” Riaz Haidri, head of high yield at broker dealer Cantor Fitzgerald & Co., said in the WSJ article.
For instance, HYG has declined 4.0% over the past month while JNK fell 5.0%. HYG allocates about 14% of its weight to oil and gas issuers. Approximately 120 of the high-yield bonds held by JNK are issued by companies engaged in the exploration, production or transportation of coal, natural gas or oil. Energy bonds make up 14% of the U.S. high-yield bond market. [There Will be Blood: Warnings for Junk ETFs With Energy Exposure]
The sell-off in energy-related junk bonds is also dragging down nonenergy high-yield debt as investors dumped everything they could to raise cash. Consequently, Goldman Sachs Group believes that speculative-grade market could experience further downside and lingering volatility.
U.S. high-yield corporate bond yields are now trading at 5.02 percentage points above comparable Treasuries, the widest spread since June 2013. HYG has a 4.27 year duration and a 5.36% 30-day SEC yield, and JNK has a 4.49 year duration and a 5.92% 30-day SEC yield.
For more information on the speculative-grade debt market, visit our junk bonds category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own shares of HYG and JNK.