A record inflow into the largest high-yield debt ETF can’t mask lingering nerves among investors.
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The largest ETFs that track the two asset classes posted about $3.1 billion of withdrawals last week.
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The fund will give investors exposure to noninvestment-grade bonds for less than half the cost of its flagship high-yield offering.
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The outflows have rekindled a popular concern that the funds could portend the start of a liquidity crunch.
June 2
The $14.8 billion iShares iBoxx High Yield Corporate Bond ETF (HYG) absorbed nearly $1.8 billion last week, the highest amount ever, as U.S. junk bond spreads tightened the most in 10 years. That’s after the market lost more than 2% in 2018, notching its worst performance since 2015 as stocks and oil were pummeled in December.
But look closer: open interest in HYG puts — bearish contracts that permit a holder to sell shares at an agreed-upon price — have also climbed to the highest on record. That can speak either to outright bearish bets or heightened hedging activity by holders.
“High-yield and leveraged loan ETFs all fell hard into the black hole of illiquidity in December and have rebounded incredibly strongly (too strongly, possibly),” Peter Tchir, head of macro strategy at Academy Securities, wrote in a note.
Last week, Bank of America strategists led by Oleg Melentyev wrote that the rally in U.S. junk bonds “is probably reaching its near-term limits.” High yield may trend tighter in coming weeks but “a pullback is possible and even likely here, just given the intensity of the move so far,” the strategists wrote.
