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By Patturaja Murugaboopathy
(Reuters) – US high-yield bonds traded at a record low in January as investors ruled out an increase in market volatility and an aggressive rate hike that could affect assets affected by the Federal Reserve.
According to Refinitiv Lipper, US high-yield bond ETFs recorded a $ 6.5 billion outflow in January, the highest ever.
(Chart: Monthly flows for high-yield US ETF bonds: https://graphics.reuters.com/GLOBAL-MARKETS/znpnejzgxvl/chart.png)
“More than any other financial asset, high-yield bonds are very sensitive to Fed policy because they include credit extensions and long-term returns. Both should worsen as the Fed tightens its policy,” said researcher Julian Brigden Macro. company president. Intelligence 2 Partners, Coloradon.
As the Fed has made it clear that it is on a fast track to withdrawing stimulus and raising rates as early as March, some Wall Street analysts are ready to raise rates seven times as much as the Fed this year.
The ICE (NYSE 🙂 BofA US High Yield Index, a benchmark used in the junk bond market, fell by almost 3% in January, the biggest drop of 11.7% in March 2020.
The index-adjusted spread of the index, which measures how much riskier companies have to pay in premiums compared to what the government pays, widened to 361 basis points at the end of last month, 310 basis points a month earlier.
The iShares iBoxx $ High Yield Corporate Bond ETF had $ 3.5 billion in sales in January, while the SPDR Bloomberg High Yield Bond ETF and Xtrackers USD High Yield Corporate Bond ETF had net sales of $ 824 million and $ 707 million, respectively.
(Chart: Top 10 US Bond ETF Outflows in January: https://graphics.reuters.com/GLOBAL-MARKETS/lgvdwxlbbpo/chart.png)
Adam Coons, portfolio manager at Winthrop Capital Management in Indiana, said the iShares iBoxx High Yield Corporate Bond ETF has a 90% correlation with declining markets. The S&P 500 share index lost 5.3% in January, the largest monthly decline since the pandemic in March 2020.
“If an investor expects a fixed income allotment to be an active security and sees their positions in red at the same time as the shares are being sold, this could cause a sticker shock,” he said.
“We believe that while VIX remains above 20, high-yield ETF flows will be questioned.”
The Wall Street fear gauge approached a 31.96-year high near the end of last month.
Bryce Dotyk, a senior portfolio manager at Sit Investment Associates, said he liked the bank loan and major loan investments combined with cash-like ETFs.
“Our ultra short ETF invests in 70% floating rate bonds with a duration of 0.8 years and average quality with a single A rating. So we like the combination of high level and low rate floating rate bonds here,” he said. .
However, some analysts believe the high-yield bonds look attractive after they were sold in January due to lower valuations.
“History has shown that retail investors tend to sell at the bottom and buy at the top. We are seeing the same phenomenon in this downturn,” Winthrop’s Coons said.
“We are buyers of high-yield bond funds in the face of this decline. In particular, we are looking for ETFs that are trading at the discount of their funds NAV.”
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