Bond traders have been pulling out of investment-grade debt, potentially signalling trouble ahead for fixed-income exchange traded funds.
According to Wells Fargo data, investors pulled $1.1 billion from U.S. investment-grade bond funds last week, the largest withdrawal since 2013, reports Lisa Abramowicz for Bloomberg.
Meanwhile, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD) saw $554.5 million in net asset outflows and Vanguard Intermediate-Term Corporate Bond ETF (NYSEArca: VCIT) lost $68.1 million last week, according to ETF.com. Over the past week, LQD experienced an additional $531.2 million in outflows.
“Credit is the warning signal that everyone’s been looking for,” Jim Bianco, founder of Bianco Research LLC, told Bloomberg. “That is something that’s been a very good leading indicator for the past 15 years.”
Fixed-income investors are growing wary of investment-grade debt with yields at historically low 3.4% while companies are increasing acquisitions, share buybacks an dividends. Additionally, many bond traders are cautious ahead of the Federal Reserve’s planned interest rate hike, its first since 2006.
Consequently, corporate-bond investors are demanding a 1.64 percentage point premium above benchmark government rates for investment-grade notes, the highest since July 2013. For instance, LQD has a 3.59% 30-day SEC yield, compared to yields of 2.184% for benchmark 10-year notes.
Looking at the Treasuries market, the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) experienced a slight outflow of $49.2 million last week. While the ETF has broke above its 200-day moving average, investors are growing more complacent, with China concerns abating and focus back on riskier equities.
Bonds have made a pretty substantial move higher in this recent pocket of volatility in the stock market,” Todd Gordon, founder of TradingAnalysis said on CNBC. “I think the stock market is beginning to stabilize and that’s going to set the bond market up for a little bit of a retracement.”
Gordon also warned that TLT is showing a “momentum divergence,” with a pattern of three lower lows in its relative strength index as prices made three higher highs. Consequently, the technical analyst believes the market is due for a pullback in the near-term.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.