August Was the Month to Take Out the Trash in the Bond Market

Updated on
  • Junk bond spread over Treasuries widens to most since 2012.
  • El-Erian says selloff in U.S. shares late Tuesday was "ugly."

Investors scooped up Treasuries and dumped junk bonds in August, based on flows in exchange-traded funds.

The result is that high-yield bonds yielded almost 650 basis points more than U.S. government securities this week, the widest spread in three years. Investors are shunning the lowest-rated securities as they purge the riskiest assets from their portfolios amid a rout in stocks and commodities around the world.

The listed bond fund that had the biggest outflows in August is the iShares iBoxx $ High Yield Corporate Bond ETF, according to data compiled by Bloomberg. It has fallen 3.5 percent this month. The iShares Short Treasury Bond ETF drew the most money, and it is little changed.

“The financial markets are in chaos,” said Will Tseng, a fund manager in Taipei for Mirae Asset Global Investments, which oversees $75 billion. “We’ve been cutting risk in our portfolios and adding Treasuries.” Mirae has been swapping junk bonds and emerging-market debt for U.S. government securities since July, he said.

The benchmark U.S. 10-year note yield rose two basis points, or 0.02 percentage point, to 2.10 percent as of 6:50 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due August 2025 fell 7/32, or $2.19 per $1,000 face value, to 99 5/32.

The MSCI All-Country World Index of shares has tumbled more than 10 percent this month, and the Bloomberg Commodity Index dropped to the lowest level since 1999.

Junk bonds are high-yield high-risk debt securities that they are rated below BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service.

Fed Outlook

Investors bought short-term Treasuries, those that most closely track what the Federal Reserve does with its benchmark interest rate, as the declines in stocks and commodities fueled speculation policy makers will delay raising interest rates.

“From a market signals perspective, they’ve waited this long to lift off, and my guess is that the market is telling them to wait a little longer,” said Jurrien Timmer, who specializes in global macro research at Fidelity Investments. “When the Fed listens to the markets, most of the time, they’re better off doing so.”

The central bank’s next policy meeting is Sept. 16-17.

Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg View columnist, said he’s “worried” about the financial markets. A selloff in U.S. stocks Tuesday was “ugly.”

Until things start looking better, Treasuries will be the haven of choice.