High-yield US bond ETFs see record outflows in January

A specialty trader works inside a booth on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 25, 2022. REUTERS/Brendan McDermid

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Feb 1 (Reuters) – U.S. high-yield bond exchange-traded funds posted record monthly outflows in January as investors dumped assets that could be hurt by increased market volatility and price hikes. aggressive rates from the Federal Reserve.

According to Refinitiv Lipper, US high-yield bond ETFs saw an outflow of $6.5 billion in January, the highest on record.

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“More than any other financial asset, high-yield bonds are extremely sensitive to Fed policy, as they encompass both credit spreads and long-term yields. Both of these are expected to deteriorate as the Fed is tightening policy,” said Julian Brigden, president of research firm Macro. Intelligence 2 Partners, based in Colorado.

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While the Fed has made it clear that it is on an accelerated path to withdrawing stimulus and raising rates as early as March, some Wall Street analysts are bracing for the Fed to possibly hike rates seven times this year.

The ICE BofA US High Yield Index (.MERH0A0), a commonly used benchmark for the junk bond market, fell nearly 3% in January, the biggest drop since the 11.7% decline in March 2020 .

The index’s option-adjusted spread, which measures the amount of premiums the riskiest companies would have to pay relative to what the government pays, widened to 361 basis points at the end of last month. , against 310 basis points a month earlier.

iShares iBoxx $ High Yield Corporate Bond ETF led with outflows of $3.5 billion in January, while SPDR Bloomberg High Yield Bond ETF and Xtrackers USD High Yield Corporate Bond ETF recorded net sales of $824 million and $707 million, respectively.

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Adam Coons, portfolio manager at Indiana-based Winthrop Capital Management, said the iShares iBoxx High Yield Corporate Bond ETF has a 90% correlation with the S&P 500 during the market downturn. The S&P 500 stock index (.SPX) lost 5.3% in January, its biggest monthly decline since the pandemic took hold in March 2020.

“If an investor expects the bond allocation to be the safety asset and sees their positions in the red at the same time stocks are selling, that can create a sticker shock,” he said. he declares.

“As long as the VIX stays above 20, we believe high yield ETF flows will be challenged.”

The CBOE Volatility Index (.VIX) – Wall Street’s fear gauge – hit a near-year high of 31.96 late last month.

Bryce Doty, senior portfolio manager at Sit Investment Associates, said he likes floating rate bank loans and senior loans combined with cash-like ETFs.

“Our ultra-short ETF, , is 70% invested in floating rate bonds with a duration of just 0.8 years and a unique average grade of A. So we like a combination of high and low quality here,” he said. .

However, some analysts believe that high-yield bonds look attractive now after their massive sell-off in January, due to their lower valuations.

“History has proven that retail investors tend to sell low and buy high. We’re seeing the same phenomenon during this downturn,” Winthrop’s Coons said.

“We are buyers of unleveraged high yield bond funds in the face of this decline. In particular, we are looking for ETFs that are trading at a discount to the net asset value of their funds.”

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Reporting by Patturaja Murugaboopathy Editing by Vidya Ranganathan and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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