Speculative-grade debt and junk bond-related exchange traded funds have stumbled since mid-August as renewed fears of the Federal Reserve’s interest rate outlook weighed on the recent risk rally.
Meanwhile, the two junk bond strategies were also among the most hated ETFs over the past week, with HYG suffering a little over $1.7 billion in net outflows and JNK experiencing close to $1.3 billion in redemptions, according to VettaFi data.
The sudden reversal may be attributed to the broader shift away from risk assets as market observers remain focused on the Federal Reserve’s hawkish monetary policy outlook. Fed officials have remained steadfast on their aggressive interest rate hike outlook to tame elevated inflationary pressures.
“Over the past week or so, there seems to be some questioning of the broader narrative that the Fed might be on pause come sometime in 2023,” Chris Lee, a bond portfolio manager at Allspring Global Investments, told the Wall Street Journal.
Many are wary that the Fed could continue its path of interest rate hikes in its next policy decision meeting on September 21, with further hints from officials at their annual Jackson Hole, Wyoming conference this Friday.
Fixed-income investors have been holding back with the Fed’s tight monetary policy hanging over their heads. Consequently, many jumped back into markets as optimism rebounded from the July lows, Jeffrey Stroll, chief investment officer at Post Advisory Group, told the WSJ.
“We were hearing anecdotally that investors were sitting at 4% to 5% cash,” Stroll said. “The average level, when we ask that question, is more like 1% to 2%.”
Looking ahead, Stroll warned that the fixed-income markets could be in for more volatility ahead of the late-September Fed meeting.
“There’s just a lot of uncertainty and lack of conviction in regards to where the market’s going to go,” Stroll added.
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