Fixed-income investors pulled billions of dollars out of speculative-grade corporate bond-related ETF as the rising rates sparked credit risk concerns.
Investors yanked more than $6 billion out of junk bonds in the past week, the largest outflows for the asset category since a previous bout of market volatility back in February, the Financial Times reports.
For example, the iShares iBoxx $ High Yield Corp Bd ETF (NYSEArca: HYG) was the most hated ETF play of the past week as investors pulled $2.8 billion from the fund, and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) experienced $1.3 billion in outflows as well, according to XTF data.
John McClain, a portfolio manager at Diamond Hill Capital Management, argued that the capital flows were due to “a risk-off attitude” that gripped global financial markets. Riskier assets like speculative-grade debt have sold off after yields on benchmark government debt hit a seven-year high, which added to concerns over extended valuations.
While some may still like the high-yield segment, David Albrycht, chief investment officer at Newfleet Asset Management, warned that “valuations are full”.
Many are also concerned about what rising rates will do to speculative-grade companies that will find it harder to pay back loans with higher rates.
“One really key point is that there is a tremendous amount of debt that is going to be coming due across investment and high yield starting in 2019 and extending across 2024,” Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, told the Financial Times. “If rates are coming up, you will be refinancing into higher rates.”
Nevertheless, the huge outflows in the junk bond market may also reveal the improved health of the overall market during volatile conditions as many investors find robust liquidity in ETF trades. For example, over 37 million shares of HYG exchanged hands on Thursday, the most for a single day since February, Bloomberg reports.
“The ETF market, which was supposed to subtract liquidity from credit markets, is actually adding liquidity by aggregating the risk and bringing in people who want to take macro risk as opposed to micro bond level risk,” Krishna Memani, head of fixed income at OppenheimerFunds Inc, told Bloomberg. “The ETF market ends up providing the live bid-ask spread that even the credit markets themselves cannot generate.”
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