Following the steep sell-off in the high-yield debt market that may have been overdone, junk bond exchange traded fund investors saw a buying opportunity and quickly jumped back into speculative-grade debt.
Global ETFs that track non-investment grade obligations brought in $371 million in new money Monday, Bloomberg reports. The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), one of the more popular junk bond ETF plays, led gains with $19 billion in new money coming in, one of its biggest inflows in almost seven weeks.
The heavy interest may hint at the ongoing faith bond investors have for speculative-rated debt or it may just reflect the ongoing demand for high-yield assets in face of a stubbornly low yielding environment, with yields on benchmark 10-year notes at 2.36%.
JPMorgan Chase & Co. and UBS Group AG analysts argued in recent research notes the sell-off was a correction rather than the result of a sustained slump, which skeptics have warned to this year’s rally. According to Bank of America Merrill Lynch, high-yield bond funds experienced $6.7 billion in outflows in the week ended November 15, the third highest outflows on record.
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Telecommunications firms were a larger contributor to the recent weakness, followed by problems in the healthcare segment. Some analysts are also concerned that retail investors, whom have taken on greater exposure to riskier assets in search of yields, may get spooked by the weakness and continue to yank money from the segment.
Junk bond naysayers have been acquiring large positions in big bond-related ETFs, like HYG, to short the debt segment or capitalize off any sudden downturns. For instance, short interest in HYG surged to as high as 24% of shares outstanding last week before the rebound in the underlying index. According to J.P. Morgan strategists an advance above 20% typically reflected a buying opportunity, pointing to past trading trends.
For more information on speculative-debt markets, visit our junk bonds category.