Investors have a love-hate relationship with junk bonds these days.
After generally fleeing riskier debt since May, they’re now pouring cash in at a record pace -- at least judging by the biggest exchange-traded funds. Both BlackRock Inc. and State Street Corp.’s junk-bond ETFs, which oversee a combined $24.9 billion, received their largest daily inflows this week on record, according to data compiled by Bloomberg.
There are a few potential reasons for the sudden change in sentiment. While Greece’s finances have deteriorated, at least its bailout talks are still going on. China’s stock market and oil appear to be stabilizing, for now anyways.
And data on the U.S. economy is good enough to point to a general expansion. While that could mean tighter monetary policy from the Federal Reserve, high-yield investors have been more concerned lately about global macroeconomic trends than rising interest rates, according to Bank of America Corp.
“Risks from China and a collapse in oil prices have trumped the Fed moving off the lower bound” as “the largest area of concern,” Bank of America analysts wrote in a July 13 report.
But that’s not the whole story. Traders are increasingly piling in and out of junk-debt ETFs as a quick way to invest in (or get rid of) riskier debt, depending on their momentary needs.
“The volatility of high-yield ETF fund flows has spiked sharply this year,” Goldman Sachs Group Inc. analysts led by Charles P. Himmelberg wrote in a July 15 note.
“If you ask me my best explanation, I’d bet it’s more technical,” he said in a telephone interview. “I bet there are enough fund managers who use it as a tool to make sure they’re tracking their benchmarks.”
Investors poured $450 million into BlackRock’s high-yield bond ETF on July 13, the most ever in the fund’s history, and another $309 million the next day, Bloomberg data show. They funneled $410 million into State Street’s similar fund on July 14, on top of $190 million the day before, according to the data.
That’s after almost $4 billion of withdrawals from high-yield bond ETFs from mid-May through the end of June, according to Wells Fargo & Co. research. Five of the largest outflows on record from junk-debt ETFs have all occurred within the past year, Goldman Sachs analysts said.
With a dearth of new bond sales to buy lately, investors have had even more reason to turn to ETFs as a way to quickly get exposure to junk debt. There was no speculative-grade bond issuance last week as global markets gyrated on Greece’s debt crisis and plunging Chinese equities, the first time in two years that the market’s shut down for a week outside the typically slower months of August and December, according to Bank of America.
Given there’s no resolution yet on Greece, much less China’s outlook, those ETF flows are likely to just keep coming and going.