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Global Markets Take Another Blow, Finish Day in a Sea of Red
Global markets took another blow on Wednesday with U.S. markets following the rest of the world’s lead.
Mining and industrials lead the underperformers as they got battered, falling over 1% on the day. With the market continuing to turn, treasuries maintained their push higher as 10 year yields hovered near the 1.77% range all day.
Renewed growth concerns weighed heavy on Chinese stocks listed in Hon Kong, as shares fell to a one month low.
The Han Seng slipped .73%, as lower commodity prices pushed the index lower. Over in Europe, all sectors were lower, as materials and mining stocks fell hard. Stocks like Glencore (GLEN) and Rio Tinto (RIO) fell over 2%, pushing the FTSE down 1.19%.
Related: Investors Look to Dividend-Paying Stock ETFs as Interest Rates Stay Low
In the low interest rate environment, yield paying equity stocks have been a rarity, especially with the performance of bonds this year. One product that’s stood out the past two months is Vanguard REIT Index Fund (NYSEArca: VNQ). The 12 month yield of VNQ is over 4.4%, as the quarterly dividends are being distributed as income. This year along, the fund has brought in almost $2 billion of assets, and since Feb. 1, VNQ is up over 7%, outperforming the rest of the market by 1.5%.
With high yield ETFs trading near year to date highs, there was a huge redemption in the marketplace for iShares Iboxx High Yield Corporate Bond ETF (NYSEArca: HYG) on Tuesday.
With the fund up over 11% since February, roughly 8 million shares or $660 million exited the fund yesterday. HYG wasn’t the only name that saw outflows, as SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) lost 2.5 million shares or roughly $87 million of assets under management. This now makes it 20 million shares redeemed out of HYG over the past three trading days.
U.S. Fixed Income ETFs Gathered $34 Billion so Far in 2016
With the addition of $4.1 billion of new assets in April, U.S. fixed income ETFs gathered $34 billion in the first four months of the year, according to Factset data. However, last month, investors took on additional credit risk, rotating away from Treasuries and to corporate bond and diversified investment-grade strategies.
As expected, last week the Federal Reserve left the fed funds rate unchanged between 0.25% and 0.5%, citing disappointing economic data released since the March meeting, including successive months of declining industrial production, along with weaker-than-expected durable goods orders.
The slack in the labor market continues to diminish, but weakness in the industrial sector has led to an increase in excess slack in production.
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Inflation has moved up recently, but Sam Stovall, U.S. strategist for S&P Global Market Intelligence, thinks Fed officials want to make sure the gains are sustainable. S&P Global continues to expect the next rate hike of 25 basis points to come in June.
In April, U.S. broad market investment-grade bond ETFs and U.S. corporate investment-grade bond ETFs gathered $1.9 billion and $1.4 billion of fresh money, respectively. iShares Core US Aggregate Bond (NYSEArca: AGG) pulled in $885 million, while Vanguard Total Bond Market Index ETF (NYSEArca: BND) added $834 million; both broad market bond ETFs hold a mix of agencies, investment grade corporates, mortgages, and Treasury bonds.
[related_stories]Meanwhile, iShares iBoxx Investment Grade Corporate Bond (NYSEArca: LQD) had net inflows of $1.4 billion last month, making it the second most popular ETF in the industry behind SPDR S&P 500 (NYSEArca: SPY). LQD recently had 44% of its assets in bonds rated BBB or equivalent, with the remainder rated even higher investment grade.
According to S&P Global Ratings Services, the investment-grade composite credit spread was 198 basis points at the end of April, 20 basis points narrower than the 218 basis points a month earlier.
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Among bonds rated BBB, the spread tightened 24 basis points reflecting, according to S&P Global Market Intelligence, the higher demand for bonds with moderate credit risk.
In contrast, investors collectively sold some of the purer Treasury bond ETFs in April they purchased earlier in the year. U.S. government Treasury intermediate- and short-term ETFs shed $1.3 billion and $1.2 billion, respectively, of their assets last month. Through the first four months of the year, Treasury intermediate-term products had $1.5 billion of inflows, while short-term ones had $1.0 billion in net outflows.