Pacific Investment Management Co.’s short-term junk-bond exchange-traded fund reported a record volume of deposits the same day State Street Corp. (STT)’s $11.6 billion ETF (HYS) saw a $378 million outflow.
Pimco’s 0-5 Year High Yield Corporate Bond ETF reported $204.1 million of inflows on April 8, according to data compiled by Bloomberg. That’s the same day the SPDR Barclays High Yield Bond ETF recorded its second-biggest daily redemption since its inception more than five years ago, equal to about $378 million worth of shares.
Pimco, manager of the world’s biggest bond fund, is attracting investors to its ETF, which has amassed $1.63 billion of net assets since its June 2011 inception, according to data on Pimco’s website. The fund focuses on debt that’s less sensitive to rising interest rates, with high-yield bonds that mature in five or fewer years poised to outperform dollar- denominated notes on average for the first time since 2008.
Institutional investors are using the funds to make wagers on a market that typically trades off exchanges in over-the- counter transactions as they seek to insulate their investments from interest rates rising from record lows.
“You’re going to see more of these block trades happening here because it’s replacing the credit-default swaps to some degree,” said Peter Tchir, founder of New York-based TF Market Advisors. “People are starting to use it as a way to short blocks of ETFs and then do the exchange.”
The biggest withdrawal from State Street’s fund, which trades under the ticker JNK, happened in May 2012, when an investor used the fund to anonymously obtain almost $780 million of speculative-grade bonds without moving prices in the secondary market.
The investor on May 10 exchanged as much as 19.7 million shares in State Street’s ETF for the equivalent of about $779.3 million in bonds held by the fund, Bloomberg data show.
Investors withdrew 9.25 million shares from the SPDR Barclays High Yield Bond ETF, according to data reported on April 8 compiled by Bloomberg. The fund’s share price has declined 0.44 percent this month, while the average price on the Bank of America Merrill Lynch U.S. High Yield index rose 0.04 percent.
ETF shares trade like stocks on exchanges, allowing investors from hedge funds to retirees to slip in and out of dollar-denominated junk bonds that have gained an annual average of 21 percent since 2008.
The funds generally don’t buy securities directly when they receive inflows or sell them to meet outflow requests. Instead, an authorized participant receives cash from investors and uses it to buy securities in exchange for ETF shares. With redemption requests, the approved participant returns shares to an ETF’s fund manager and receives securities.
Junk bonds that are due in five or fewer years have returned 3.13 percent this year, compared with 3.1 percent for high-yield bonds generally, Bank of America Merrill Lynch index data show.
High-risk, high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.
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