Fixed-income traders are becoming increasingly bearish on the speculative-grade, high-yield debt market. Exchange traded fund investors can also hedge against further weakness in the junk bond segment through an alternative strategy.
Investors have pulled more than $3 billion out of the $14 billion iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) for 7 consecutive days, the longest streak of outflows since September 2020, Bloomberg reports. Almost $6.6 billion has been redeemed from HYG so far in 2022, putting the ETF on pace for its worst year of outflows ever.
The sudden exodus comes as investors shunned fixed-income assets, especially higher-risk categories like high-yield debt, as the Federal Reserve begins multiple interest rate hikes to combat inflationary pressures.
Looking ahead, the pain may continue as about 70% of junk bond investors projected a bigger risk premium for the asset category for the next three months, the most since the global financial crisis, according to the Bank of America Corp.
Many high-yield managers have pointed to mounting risks associated with rising interest rates, surging inflation levels, and heightened concerns over the global economic outlook.
“It’s a double whammy – rates repricing higher, equities likely to reprice lower, meaning high-yield companies mechanically have higher leverage and a more expensive refinancing rate,” Peter Chatwell, head of multi-asset strategy at Mizuho International Plc, told Bloomberg. “That’s not to mention the general softness in earnings that looks likely from the stagflation.”
“We also probably need to see higher default rates realized, so that some bottom fishing can take place with conviction,” Chatwell added.
Alternatively, investors may also consider inverse or short junk bond ETFs to further hedge against a dip in speculative-grade debt markets. The ProShares Short High Yield (NYSEArca: SJB) takes the inverse -1x or -100% daily performance of the Markit iBoxx $ Liquid High Yield Index, which acts as the underlying index for HYG.
For more news, information, and strategy, visit the Fixed Income Channel.