Some high-yield bond investors appear convinced the Federal Reserve will continue raising interest rates, prompting outflows from some junk bond exchange traded funds (ETFs), including the iShares 0-5 Year High Yield Corporate Bond ETF (NYSEArca: SHYG).
SHYG, which turns five years old in October, follows the Markit iBoxx USD Liquid High Yield 0-5 Index. The ETF has an effective duration of 2.41 years. Duration measures a bond’s sensitivity to changes in interest rates.
SHYG “had more than $465 million of outflows on Wednesday, the most ever in a single day. But that was just part of the $1.5 billion that’s left the fund over the last two weeks, as deserting investors have yanked almost 40 percent of its assets since May 29,” reports Bloomberg.
Corporate debt is reaching its highest level since before the financial crisis, which has caused Moody’s to warn that substantial trouble is ahead for junk bonds when the next downturn arrives.
Fed Moves & Higher Interest Rates
This year, expectations of higher interest rates have also chased investors from the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds by assets. On a year-to-date basis, those two ETFs have lost nearly $4.9 billion in combined assets.
HYG’s underlying index, the Markit iBoxx USD Liquid High Yield Index, also requires holdings to have at least $400 million in par value, and the debt issuer must have at least $1 billion in total debt outstanding. Due to their similar focus on liquidity, the two high-yield bond ETFs have similar portfolios.
The U.S. economy is expanding, but not too rapidly and employment is rising, suggesting the Fed has room to proceed with several more rate hikes. U.S. unemployment resides at multi-decade lows.
Those data points add “to speculation that the Fed will raise rates sooner than later — making short-duration junk bonds increasingly unattractive as yield-hungry investors can get what they want from investment-grade debt,” according to Bloomberg.
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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.