BofA Turns Bearish on Corporate Bonds With Buyers Fleeing ETFs

Bank of America Corp. strategists are recommending bearish wagers on investment-grade corporate bonds as investors flee exchange-traded funds that own the debt at the fastest pace in more than four years.

“We move to a tactical underweight stance on high grade by buying protection on the CDX IG,” an index of credit-default swaps pegged to investment-grade debt, according to a June 19 report from Bank of America’s Hans Mikkelsen and Yuriy Shchuchinov. “We think that in the short term investment grade credit spreads are biased wider,” they wrote.

Investors are souring on the debt after Federal Reserve Chairman Ben S. Bernanke said the central bank may start slowing stimulus efforts that have funneled more than $2.5 trillion into the financial system since 2008. He said yesterday that the Fed may “moderate” its pace of bond purchases later this year provided that economic risks subside.

Shares of BlackRock Inc. (BLK)’s $21 billion investment-grade bond ETF have plunged 3.7 percent this month as of 11:58 a.m. in New York, the biggest decline for a month since February 2009, according to data compiled by Bloomberg. Shares have dropped the furthest below corporate-bond prices since August 2011, signaling that the fund may reduce holdings to lower its net asset value, the data show.

Redemptions from mutual funds and ETFs probably will accelerate in response to the declining prices, the Bank of America strategists wrote.

Dollar-denominated investment-grade bonds declined 1.5 percent this month through yesterday as rising U.S. Treasury yields eat into the notes’ value, Bank of America Merrill Lynch index data show. They’ve lost more than the government notes as investors increase the amount of extra yield they demand to protect against deteriorating creditworthiness by 10 basis points this month, to 157 basis points, the data show.

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