There’s a big rotation taking place in the $4.4 trillion ETF market, with investors rushing to one of the safest corners of the world.
Traders yanked over $7 billion from high-yield bond ETFs this week, according to data compiled by Bloomberg. At the other end of the risk spectrum, Treasury-heavy funds have absorbed nearly $3.8 billion as investors seek safety.
The bloodbath in risk assets has intensified on deepening concerns about the economic fallout from the spread of the coronavirus. The outbreak has shut the U.S. and Europe corporate bond markets, caused a record percentage jump in Europe high-grade credit insurance, and put Asian dollar bonds on track for the worst week since 2014. With investors piling into Treasurys — the global safe haven asset of choice — benchmark 10-year yields hit a record low of 1.14%.
“Everything rests on the outlook for coronavirus, but it’s a rotation that certainly makes sense in this environment,” said Seema Shah, chief strategist at Principal Global Investors. “Despite the very sharp drop in Treasury yields, there could be further to go if the news flow continues to deteriorate.”
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"We seek to finance the government at the least possible cost to taxpayers over time," said Treasury Secretary Steven Mnuchin.
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Defined-maturity funds offer traditional fixed-income interest payments.
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The funds may be gaining traction among older investors with significant assets, but rarely live up to their billing.
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Shah expects that the exodus from traditionally risky assets into quality will continue. Her haven picks include Treasurys, the U.S. dollar, gold and investment grade fixed-income.
New corporate issuance has ground to a halt globally as companies opt to wait out the uncertainty, with only one high-yield issuer tapping the market this week. It’s a stunning turnaround from the start of 2020, when U.S. junk debt was on track for the busiest pace of issuance in a decade.
The credit market freeze has ETF investors rushing for the exit. The biggest U.S. junk-bond fund — BlackRock’s $14 billion iShares iBoxx High Yield Corporate Bond ETF (HYG) — posted record weekly outflows of about $3.5 billion.
That’s largely been to the benefit of Treasury-focused funds. The iShares 3-7 Year Treasury Bond ETF (IEI) and its 7-to-10 year counterpart are both on track for the biggest week of inflows since September. In addition, the price of the iShares 20+ Year Treasury Bond ETF (TLT) is on pace for another record high.
Investors who had shunned Treasurys in favor of assets like junk bonds are now being forced to change course, according to Wells Fargo Investment Institute’s Sameer Samana. While now isn’t the time to “rush” into Treasurys, they are one of the only assets that can truly behave as a stabilizer in portfolios during turbulent times, he said.
Nearly all of the fixed-income funds held short term debt.
“The Treasury market is telling you the odds of a recession — a global recession, one that includes the U.S. — are rising quickly,” said Samana, senior global market strategist. “We would argue that the odds still remain 50%, but the risks are rising very quickly.”
Goldman Sachs economists expect the world economy to succumb to a “short-lived global contraction” that forces the Fed to slash borrowing costs in the first half of this year. In this scenario, they said the Fed’s policy-setting Open Market Committee would cut its key interest rate by 25 basis points in March and ultimately by 75 basis points through June.
