Speculative-grade debt exchange traded fund (ETF) investors may be calling it quits after a three-month rally in junk bonds.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) experienced 27.8 million share redemptions, or about $2.6 billion in outflows, over the past four days, the longest losing streak since oil bottomed out on Februar 11, reports Sridhar Natarajan for Bloomberg.
While not to the extent of HYG, the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) also saw outflows of $245.7 million over the past week.
Related: Rising Corporate Defaults Could Keep a Lid on Junk Bond ETFs
The exodus comes after a rally in high-yield debt, with HYG up 7.5% and JNK 8.2% higher over the past three months, on a risk-on environment and rebound in crude oil prices – speculative-grade debt initially plunged along with oil prices on fears of rising default risks among energy producers.
However, with many anticipating slow economic growth for the year ahead, some are concerned about the future prospect of riskier corporate debt.
“We continue to make no secret of our distaste for corporate fundamentals,” Bank of America Corp. strategists led by Michael Contopoulos said in a note, projecting total returns in high-yield could be between zero and one percent.
[related_stories]As junk bonds rallied, the risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 junk-rated firms, rose to its highest level in a bout a month. The gauge reflects the perception of creditworthiness and rises in response to growing credit concerns.
On the other hand, some observers believe the wide yield spreads between junk bonds and government debt reflect attractive valuations in the speculative-grade debt market – yields on speculative-grade debt were 639 basis points over comparable government bonds Thursday, Bloomberg reports.
Related: Junk Bond ETFs Are Moving in Step with Oil
“We think spreads are wide,” Collins, co-manager of the Prudential Short Duration High Yield Income Fund, told Bloomberg. “There’s definitely scope for them to fall, especially if you think some of the defaults that everybody’s been waiting for maybe are already happening.”
HYG, which has a 4.02 year duration, has a 6.58% 30-day SEC yield. JNK, which has a 4.38 year duration, has a 6.85% 30-day SEC yield. In contrast, 5-year Treasury bonds yield 1.20%.
iShares iBoxx $ High Yield Corporate Bond ETF