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Fixed-income ETF hit with biggest outflow in 15-year history

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As stocks boogied to the risk-on beat Wednesday, investors in the world’s third-largest fixed-income ETF left the party at a frenetic pace.

The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) was hit by a record $921 million outflow, the largest daily redemption since its 2002 inception, and the most among U.S.-listed passive vehicles across asset classes.

At 2.7%, it represents the largest post-crisis withdrawal as a share of total assets at the start of the session for the high-grade, dollar-denominated fund. It now manages $33 billion.

And it comes on the heels of last week’s record redemption, underscoring souring sentiment toward the asset class on U.S. interest rate risk.

The number of U.S. rate hikes expected by investors from now until the end of next year has risen to four in the wake of yesterday’s inflation data.

While corporate bond spreads have remained relatively stable in the recent equity turmoil, investors in higher-beta credit ETFs — which ebb and flow with the global tide of risk appetite — are shunning longer-duration debt.

Higher U.S. real rates and inflation premiums threaten to erode returns in corporate debt markets, while motivated sellers forced dealers to absorb supply.

Both long and short investments focused on volatility were mostly crushed lately.
February 14

Rising yields pose a larger threat to LQD than many of its peers. At 8.68 years, its modified duration — a measure of its sensitivity to changes in interest rates — is well above that of the iShares Core U.S. Aggregate Bond fund (AGG), a broader gauge of the U.S. fixed-income market.

Bloomberg News