Speculative-grade junk bond ETFs are enjoying huge inflows as fixed income investors seek out riskier assets to generate significant yield.
On Wednesday alone, the iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) attracted $1.3 billion in net inflows, marking its second-biggest single-day inflow ever, Bloomberg reports.
Meanwhile, the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) brought in $560 million in new inflows on Wednesday, the most since April. State Street’s SPDR Bloomberg Barclays Short-Term High Yield Bond ETF (NYSEArca: SJNK) saw a record $228 million in inflows.
The sudden spike in interest for junk-rated bonds reflects the ongoing reflation trade that has spanned across assets as the economic outlook improves. The improved outlook has weighed on bond markets and set yields soaring higher, but it has also improved demand for relatively lower duration junk bond ETFs.
“What we’ve had in bond markets for much of the year to date is a selloff in duration, which has meant that high yield, which is high spread and low duration, has been the safer asset class,” Peter Chatwell, head of multi-asset strategy at Mizuho International Plc, told Bloomberg. “These flows reflect that, and we expect there will be further moves in that direction as U.S. growth becomes more broad based and helps to support the rest of the world.”
The lower duration in junk bond ETFs has helped them better-adjust to the sudden spike in yields. For instance, HYG only dipped 1% over the past month, compared to a 3.6% drop in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which has an effective duration of close to 10 years.
The inflows into junk bonds may also have coincided with an uptick in bearish bets since short interest as a percentage of shares outstanding rose to the highest level since April this week. This may indicate that the cash influx could be attributed to the ‘create-to-lend’ process where new shares are generated for investors to borrow and then sell short.
“If you look at some of the high-yield flows in global ETFs, they are still seeing outflows, so I’m thinking create-to-lend because of that divergence,” BI analyst Athanasios Psarofagis told Bloomberg. “But the flows are pretty widespread in the U.S., so it could be a little bit of both. We did get that nice market bounce, which tend to correlate with HYG inflows.”
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