Investors flee junk ETFs as high-yield bonds erase gain for year

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The exodus from high-yield debt shows few signs of easing, with investors pulling hundreds of millions of dollars more from the largest ETFs that buy junk bonds as a global index tracking the securities erases its 2020 gains.

The Bloomberg Barclays Global High Yield Index flipped to an annual loss this week after just seven weeks in the green, as credit joins the pandemic-spurred gloom in stock markets.

Some $334 million fled the iShares iBoxx High Yield Corporate Bond ETF (HYG) Wednesday as a fifth session of withdrawals from the biggest U.S. junk ETF took the total to almost $3.3 billion. The outflows extended to the SPDR Bloomberg Barclays High Yield Bond ETF, which has now lost $1.1 billion in three days, as well as well as Europe’s iShares EUR High Yield Corp Bond UCITS ETF.

“When market sentiment turns, outflows from the riskier segments of the market are to be expected, especially following the inflows into credit markets that have taken place since the Fed’s corporate facility announcement,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privee. The fourth quarter “is set to have a number of key risks which could see volatility return,” he said.

Mutual funds with the decade’s biggest outflows
“Investors are going into lower, more passive mutual funds because they don't want to pay the fees,” an expert says.

Investors are retreating from riskier bets fanned by zero-rate policies and central bank bond buying programs that helped to spur record sales of U.S. junk bonds. The American presidential election and virus-spurred lockdowns all loom large for the rest of 2020.

The longest outflow streak since the pandemic selloff in the first quarter means the biggest U.S. junk ETF has now erased about a third of its net inflow for the year.

The shift in sentiment mirrors the stock market, where a global index is down 7.5% in about three weeks. The S&P 500 is on the brink of a correction.

“Outflows in high-yield ETFs have been following from what we are seeing in risk sentiment,” said Kshitij Sinha, a portfolio manager at Canada Life Investments. “In general, a rise in volatility should imply wider spreads, even in investment-grade.”

--With assistance from Marianna Aragao.

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