Fixed-income investors seem to be taking interest rate risk very seriously ahead of the Federal Reserve December meeting, trimming exposure to intermediate-term corporate bond ETFs.

The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), which tracks speculative-grade corporate debt, experienced record outflows on Thursday as investors yanked almost $1 billion out of the junk bond ETF in one day, according to Bloomberg data.

Meanwhile, the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD), the largest ETF that tracks investments-grade corporate debt, also lost $785 million in assets on Thursday.

In total, HYG experienced $1.4 billion in net outflows over the past week while LQD saw $1 billion in outflows.

Bond yields have been slowly pushing higher over October, with yields on benchmark 10-year Treasury bonds at 1.85%, its highest level since May. Investors have been selling off fixed-income assets and pushing up yields as more anticipate a December interest rate hike.

Options traders were pricing in as high as a 74% chance the Fed could increase interest rates by December on Friday, but futures traders pared back bets to about 69% in response to the Federal Bureau of Investigation’s renewed probe into Democratic Presidential nominee Hillary Clinton’s use of private e-mails while secretary of state. The markets seem to believe that a Donald Trump presidency would be bad for stocks, add to uncertainty and cause the Fed to push off on a rate hike.


While we are seeing outflows in the intermediate-term corporate bond ETFs, like HYG and LQD, investors are still relying on fixed-income assets for yields. For instance, as we mentioned before, the PowerShares Senior Loan Portfolio (NYSEArca: BKLN), which tracks speculative-grade senior floating-rate bank loans that limit interest rate risk, has seen heavy investor interest, attracting $1.6 billion in net inflows over the past 90 days. BKLN shows a 3.72% 30-day SEC yield while HYG has a 3.01% 30-day SEC yield.

The high interest in BKLN and sudden disinterest in HYG suggest that investors are not as concerned about credit risk as rate risk. BKLN has limited rate risk as the floating component of a loan resets at an average 36.46 days, whereas HYG comes with an 8.36 year duration, which makes HYG more sensitive to changes to interest rates. Investors have also grown less concerned about defaults after a rebound in crude oil prices, which could help support the highly leveraged energy sector.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.