The latest stock sell-off appears to also be affecting the fixed-income space, as the capital markets saw outflows in some of the largest fixed-income ETFs within the past week, such as the iShares Core US Aggregate Bond ETF (NYSEArca: AGG), which experienced investor flight to the tune of almost $2 billion.
“I think fixed-income portfolio managers have had their come to Jesus moment,” said Janet Johnston, TrimTabs asset management portfolio manager. “They were going with the Fed, not fighting with the Fed. Since 1998, when rates have gone up, stocks have gone up. When rates have gone down, stocks have gone down. We think this is more of a typical market correction.”
The lockstep between stocks and bonds as of late is not something typically seen within the capital markets as both are prone to marching to the beat of their own drum. However, the music they are making together lately is something analysts are listening to closely, but something investors would like to ignore.
“Right now, if you look at the correlation between stocks and bond yields, it’s at the lowest to turning negative since 2014,” said Bloomberg contributor Sarah Ponczek. “That has only happened three times since 2000. Every time that did happen, it was followed by an equity market sell-off so this is something people are going to definitely be watching.”
Nonetheless, with financial companies like Citigroup, Wells Fargo and J.P. Morgan Chase scheduled to release earnings tomorrow, positive results will help confirm that the latest sell-off in both stocks and bonds is evidence of a typical market correction.
“We are well within the ranges of a normal market correction,” said Johnston. “Next week, you’re going to start hearing about good earnings.”
Related: Gold ETFs Show Their Mettle as Stocks Slide
High-Yield, Investment-Grade ETFs Rise on Day 2 of Sell-Off
On the second day following yesterday’s 800-point slide in the Dow, high-yield and investment-grade fixed-income ETFs managed to go green in another sea of red–ProShares High Yield—Interest Rate Hdgd (BATS: HYHG) rose 0.46% and the iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) was up 0.48% as of 2:30 p.m. ET.
HYHG tracks the performance of the FTSE High Yield (Treasury Rate-Hedged) Index. and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.