Falling oil prices, rising interest rates and concerns about deteriorating credit quality were among the factors that chased investors from high-yield corporate bonds and the related exchange traded funds in 2018. Some data points suggest investors are again embracing junk bond ETFs.
It’s a clear sign that the risk-off sentiment that started in October is affecting the high-yield sector that was flying high during the midst of the extended bull run in the capital markets–a time when investors were willing to forego the extra risk in order to achieve the higher yields.
Last year, the iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG) and the SPDR Bloomberg Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond ETFs by assets, were besieged by outflows. In 2018, JNK and HYG saw outflows of $5.11 billion and $3.49 billion, respectively, putting both ETFs among the top 10 for outflows in 2018. Early in 2019, that trend appears to be easing.
“BlackRock‘s (BLK) iShares iBoxx High Yield Corporate Bond ETF (HYG) took in $472 million on Monday, while a short-dated junk bond ETF run by State Street (STT) added $222 million, a record for the fund,” reports Bloomberg.
Renewed Enthusiasm
JNK seeks to provide investment results that correspond generally to the price and yield performance of the Bloomberg Barclays High Yield Very Liquid Index, which is designed to measure the performance of publicly issued U.S. dollar denominated high yield corporate bonds with above-average liquidity. HYG tracks the investment results of the Markit iBoxx® USD Liquid High Yield Index, which is comprised of high yield U.S. corporate bonds that have less than investment-grade quality.
“The inflows mark a U-turn in sentiment after everything from trade tensions and slower economic growth to rising rates sent a Bloomberg Barclays measure of high-yield debt tumbling to its lowest level since May 2017 late last year,” reports Bloomberg. “That gauge has now climbed for seven straight trading days, and flows into junk-bond funds suggest the rout is over for now, according to Jay Pestrichelli, co-founder and managing director of ZEGA Financial.”
The SPDR Bloomberg Barclays ST HY Bd ETF (NYSEArca: SJNK), the shorter duration counterpart to JNK, has also recently some inflows and is up more than 2% to start the new year.
For more trends in fixed income, visit the Fixed Income Channel.
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.