Amidst the Brexit induced shakeup, speculative-grade high-yield bond exchange traded funds attracted huge inflows as an extended low-rate outlook bolstered the case for yield-generating assets.
Following the United Kingdom’s Brexit tally, investors piled $291 million into the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), reports Rachel Evans for Bloomberg. Over the past week, HYG attracted $1.5 billion in net inflows.
“A lot of it is yield-seeking investors,” Karen Schenone, fixed-income strategist at BlackRock Inc.’s iShares unit, told Bloomberg. “The Fed hike has been completely priced out for 2016.”
HYG shows a 6.41% 30-day SEC yield. Meanwhile, yields on benchmark 10-year Treasury notes were hovering around 1.48%.
The Brexit vote came just eight days after the Federal Reserve signaled lower expectations for an interest rate hike ahead of the uncertainty over the U.K. referendum and the ongoing speculation surrounding the U.S. presidential run in November.
Adam Patti, chief executive officer of IndexIQ, New York Life Insurance Co.’s exchange-traded-fund unit, argued that bond ETFs will likely continue to benefit in the weeks ahead on increased volatility and the upcoming presidential election.[related_stories]
“When there’s more certainty around rate hikes, or a lack thereof, people are more willing to get into fixed-income generally, and then on top of that, it’s the flight to safety,” Patti told the Wall Street Journal. “It’s sinking in that we might be in for a lot of uncertainty over the coming months and maybe years.”
Futures traders have cut the likelihood of a hike in U.S. rates by year-end to around 10% since the Brexit, down from 50% on the day of the vote. Some traders are even assigning a 10% probability of a Fed interest rate cut at its July meeting and more than a 20% chance of a rate cut at subsequent meetings later this year and in early 2017, reports Jen Wieczner for Fortune.
“You see a lot of people chasing yield,” Will Wall, head trader at RiverFront Investment Group LLC, told Bloomberg. “If we continue to see the sell-off in equities, we would probably position more money in the fixed-income space, whether that be Treasuries or high yield.”
For more information on the speculative-grade debt market, visit our junk bonds category.
iShares iBoxx $ High Yield Corporate Bond ETF