Tag Archives: junk bonds

High Yield ETFs Take a Tumble

High-yield corporate bond ETFs tumbled today.

“This looks to be an exit trade from this asset class,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital in a note, rather than a move to receive delivery of actual bonds.

Specifically, Hempstead’s desk has been very active in SPDR Barclays Capital High Yield Bond ETF (JNK), which dropped 1.3% to $38.19; iBoxx $ High Yield Corporate Bond Fund (HYG), which fell 1.4% to $87.59; PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB), down 0.4% to $18.46, and SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK), down 0.6% to $29.70.

After a redemption of about $725 million in the SPDR Barclays Capital High Yield Bond ETF last week, allegedly for delivery of actual bonds, Hempstead says the pace of selling in high yield ETFs needs to be closely monitored.

So far this year, each of these funds has seen a significant increase in assets, for a total of more than $6 billion year-to-date. With the iBoxx fund holding $14.8 billion in assets under management, the SPDR high yield ETF holding $11.2 billion, the PowerShares ETF at $943 million and $119 million in the SPDR short-term high yield, all the funds have about doubled their assets since January 2011, says Hempstead.

“We are watching closely to see how well the Street can absorb a short-term exit strategy from these funds,” said Hempstead in a note. “How would the fixed income world respond to a heavy and swift sell-off in an ETF product space that has seen a steady inflow of assets for almost 18 months?”

He adds the products have started trading at a discount to their respective NAV, which is not uncommon, but they have a tendency to trade at a premium for longer periods than at a discount.

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High Yield ETFs Look Especially Risky Now

Robert Powell of MarketWatch today says you should buy junk bonds, while Zero Hedge says he’s turned bearish on the sector.

I’m going to go with Zero Hedge because he makes a more compelling case, and in fact, if you didn’t see the headline on the Marketwatch story, you might think it was telling you to sell as well. In fact, the Marketwatch story’s big bull, Steve Huber, manager of the T.Rowe Price Strategic Income fund says, “To be sure, there is a scenario when investing in junk bonds might not so wise. If the U.S. growth slowdown proves not to be temporary and European periphery issues deteriorate further, the general selloff in risk assets could accelerate.”

It sure looks like that’s happening. And investors aren’t waiting around to see what happens. Powell says junk bond mutual funds saw $1.6 billion in outflows in just one week this month.

Meanwhile, ZeroHedge is down on the entire high-yield market, especially Greek, Irish and Portuguese bonds. However, he is particularly bearish on the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK).

He says if the junk bonds continue to see heavy outflows “it will be hard for high yield to maintain current prices, particularly given how illiquid it currently is.” He says you can tell how illiquid they market has become by the haircuts both funds took last Thursday, when HYG fell 2%. As trading volumes in junk bonds fell and bid/ask spreads widened, institutional investors sold the ETFs rather than the actual bonds. With the liquidity at an extreme low, he says cut your high-yield risk, and is on the verge of shorting the ETFs.