While high-yield bond ETFs have somewhat pared its recent falloff, the speculative-grade debt markets remain on shaky footing.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) and the SPDR Barclays High Yield Bond ETF (NYSEArca: JNK), the two largest high-yield corporate bond exchange traded funds, are down 0.6% over the past month on heavy selling pressure after rising 0.7% and 0.8%, respectively, over the past week.
According to Bank of America Merrill Lynch, high-yield bond funds experienced $6.7 billion in outflows in the week ended November 15, the third highest outflows on record, reports Christopher Whittall for the Wall Street Journal.
Telecommunications firms were a larger contributor to the recent weakness, followed by problems in the healthcare segment. Some analysts are also concerned that retail investors, whom have taken on greater exposure to riskier assets in search of yields, may get spooked by the weakness and continue to yank money from the segment.
“We’re seeing huge outflows from mutual funds and ETFs, so it’s triggering this domino effect,” Stephen Ketchum, managing partner at Sound Point Capital Management, told the WSJ.
Given the recent pressure on the junk bond segment, other areas are beginning to draw unwanted attention, such as Dutch-listed telecom Altice NV, whose bonds have struggled following disappointing earnings and the resignation of its chief executive. The price of Italian contractor Astaldi SpA’s bonds due in 2028 were also under pressure.
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Jonathan Butler, head of European leveraged finance at PGIM Fixed Income, also pointed out that the relatively weak U.S. corporate earnings combined with a couple of problems among European companies have compounded the market weakness. Meanwhile, investors have grown more mindful of the recent run up in high yield bonds.
The pullback, though, may have opened an opportunity for those whom believed that it was only a short-term event. BAML strategists highlighted that high-yield bond outflows hit $25 billion during the market downturn of late 2015 and early 2016. For outflows to continue to rise, markets would have to see that a larger share of issuers is in danger of defaulting, and there is no such signs yet.
“[Credit] fundamentals are still very good,” Peter Aspbury, a portfolio manager at J.P. Morgan Asset Management, told WSJ. “Our concern is more around the (market’s) mentality over the next few weeks. Very often these idiosyncratic situations are enough to spook investors.”
For more information on speculative-debt markets, visit our junk bonds category.