Junk-Bond Buyers Choose Easy Exits to Solve Ambivalence

Bond buyers are cashing in on profitable wagers in the $2 trillion junk market and hunkering down for a selloff. They’re just doing it in a way that makes it easy to change their minds.

Investors yanked a combined $620 million from the two biggest high-yield bond exchange-traded funds last week, making them the least popular among all fixed-income ETFs in the period, according to data compiled by Bloomberg. After 10 straight months of gains, U.S. junk securities have lost 0.13 percent in July, with the most-frequently traded debt faring worse.

The notes are losing their luster after yields, as measured by a Bank of America Merrill Lynch U.S. index, plunged to a record low of 5.69 percent on June 23.

“Many investors expect a pullback in risk markets after the almost straight-line rally of the last few months if not years,” JPMorgan Chase & Co. strategists led by Jan Loeys wrote in a July 11 report. “But most of these same market participants also say they plan to buy on pullbacks.”

Investors are using the easiest ways to reduce their junk holdings, hanging on to the illiquid securities that would be more difficult to buy again if their sentiment changed.

Fund Underperformance

Junk-bond ETFs, which own less than 3 percent of the outstanding dollar-denominated debt, were the “primary driver” behind outflows across the entire asset class last week, according to a July 10 Wells Fargo & Co. report. High yield funds overall lost a net $419 million.

While the ETFs were traditionally aimed at individuals, they’re increasingly being used by big institutions that want to quickly adjust exposure to less-traded securities. BlackRock Inc.’s $13.3 billion high-yield ETF, the biggest of its kind, is underperforming the market this month, losing 0.32 percent.

The iBoxx Liquid High-Yield Index, made up of the easiest to trade speculative-grade securities, is also down 0.27 percent in July, more than double the losses on the Bank of America Merrill Lynch U.S. High-Yield Index.

Investors may be focusing on the most-liquid bonds and ETF shares because they’re not committed to the idea that this is the big downturn that firms such as Blackstone Group LP have been anticipating.

After all, with central banks around the world trying to pump up growth, those skimpy junk yields may start looking attractive again soon.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE