Growing anxious over the rising U.S. borrowing costs, fixed-income investors have been dumping speculative-grade or junk bond ETFs.
Over the past week, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) were among the least popular ETF trades, experiencing $1.3 billion and $496 million in net outflows, respectively.
The losses from HYG were the biggest since October 2016, Bloomberg reports.
“The breaks higher in U.S. yields are rocking several parts of the market,” Dave Lutz, head of ETFs at JonesTrading Institutional Services, wrote in a note. “HYG is not a fan.”
Bond investors have been dumping their exposure to the more riskier segment of the fixed-income market as U.S. Treasury yields reached a level that triggered a global sell-off. Yields on benchmark 10-year Treasury notes are now hovering around 2.82%.
“In a world where your 10-year is pushing 3 percent, it’s hard to have high-yield trading at 5.5″ percent, Randall Parrish, senior portfolio manager at Voya Investment Management LLC, told Bloomberg. “It’s not like we’re afraid of credit – spreads aren’t really going wider.”
With yields on more conservative debt going up, traders view the yields on junk debt less as less attractive in comparison relative to the risk exposure. For instance, HYG shows a 5.15% 30-day SEC yield and JNK has a 5.26% 30-day SEC yield.
“The tailwinds we’ve had in the last few years, in terms of mutual-fund inflows, in terms of central bank support, in terms of generous valuations, we do think that a lot of those are fading,” Neil Sutherland, a portfolio manager at Schroders, told Bloomberg. “We would be a lot less optimistic on credit products than we have been over the last three or four years.”
For more information on the fixed-income market, visit our bond ETFs category.