Falling Junk-Bond ETFs Show Concern After Bank Retreat

It’s been an ugly week for U.S. high-yield bonds, the worst in more than a year.

As investors fled, they turned to the easiest exits and pulled more than $1 billion from exchange-traded funds, according to data compiled by Bloomberg. With Wall Street banks generally devoting less capital to trading, there wasn’t much of a buffer on the other side to prop up values.

The result: Yields on the notes posted their biggest weekly increase since May 2012, surging to 5.7 percent from 5.3 percent on July 25, according to Barclays U.S. Corporate High Yield index data. The notes tumbled 1.3 percent in July, the first month of losses since last August.

“It’s finally starting to crack,” Marvin Loh, senior fixed-income strategist at BNY Mellon Global Markets, said in an e-mail. It “felt scary.”

Bondholders are turning to ETFs, which have shares that trade like stocks on exchanges, to express their views on the market because it’s a faster way in and out of securities that still trade via telephone calls and e-mails.

Investors pulled $578.9 million from U.S. junk-bond exchange-traded funds yesterday alone, with BlackRock Inc.’s $11.8 billion ETF seeing $362.8 million of withdrawals, according to Bloomberg data. Shares of BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF have plunged 2 percent in the past week to the lowest since October, Bloomberg data show.

Changing Sentiment

Bond buyers are souring on junk debt after yields fell to an all-time low of 4.83 percent on June 20, Barclays data show. Speculative-grade companies have been taking advantage of the low borrowing costs by selling record amounts of the debt.

The change in sentiment has come without one obvious catalyst.

There’s lots of angst about global stability generally, with the war in Gaza, escalating conflict in Ukraine and Argentina’s debt crisis. Still, U.S. growth is accelerating, which should be a good thing for risky assets -- except it could be a bad thing if it means less Federal Reserve stimulus to prop up the value of risky assets.

The big fear is that no one wants to be the last one out of a burning building. Junk-bond owners are growing increasingly concerned that they won’t be able to exit when they really need to, since the retrenchment at the world’s biggest banks has made it more difficult to trade big chunks of the debt quickly.

Dealer Holdings

Primary dealers cut their net high-yield bond holdings to as low as $4.84 billion in the week ended July 9, the lowest since the Fed started reporting the more detailed data last year. Dealers have held a net $7 billion on average since the Fed started reporting the more detailed data in April 2013, equal to about 0.5 percent of the U.S. high-yield bond market.

Rather than wait until there’s a true exodus from the bond market with rapidly rising yields, junk investors are preparing ahead of time. It remains to be seen whether this is a dress rehearsal or the beginning of a more protracted downturn in the debt.

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