Wall Street Eyes Junk Bond ETF for Easy Liquidity

A speculative-grade, junk bond exchange traded fund has experienced extreme ebbs and flows in assets under management, reflecting banks and institutions’ reliance on a high-yield bond ETF to access the underlying debt market.

Over the past month, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) experienced record-breaking daily withdrawals, despite its relatively stable performance, and the flows often followed or preceded huge deposits, reports Lisa Abramowicz for Bloomberg. HYG is up 1.3% for the past month.

Related: Junk Bond ETFs: Support from Managers Playing Catch Up?

The heightened volatility in daily flows suggests that the increased activity is a result of rising usage among bond dealers. Banks may be utilizing HYG as an alternative to their own stockpiles of riskier debt securities, relying on an ETF as an easy source of bonds for client redemptions.

For instance, if a client gives money to a dealer to buy certain amount of high-yield debt, the broker could use the money to acquire a junk bond ETF that can be redeemed in kind for underlying debt securities, which is then given back to clients.