Traders Plow Record Cash Into Junk Bond ETF as Tone Improves

  • High-yield bond ETF has received most-ever inflows over 6 days
  • HCA Holdings boosts high-yield debt offering to $1.5 billion

Investors are sinking cash back into the largest junk-bond exchange-traded fund signaling that the rout in the market for risky corporate debt may be overdone.

BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund absorbed a record $1.5 billion over the last six days, according to data compiled by Bloomberg, a sign that sentiment among credit investors is improving as crude rebounds from a 12-year low. The flows mark a reversal from the start of the year, when a similar amount was pulled from the ETF as the Standard & Poor’s 500 Index plunged more than 10 percent.

“A few weeks ago, some people were scared that we were headed back in 2008 -- perception of fundamentals was pretty bad,” said John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York. “We were way ahead of ourselves. We’re back looking at things in a more sensible way.”

Investors are taking note, as shares of companies with weak balance sheets, hit hardest during the worst-ever start to a year for U.S. stocks, have started to reprise their role as outperformers amid the latest rally. The companies stand poised to benefit from drops in the premium on high-yield debt and lower borrowing costs for junk issuers.

The S&P 500 fell 0.2 percent to 1,973.51 at 12:19 p.m. in New York.

Outflows Ended

“Both ETF and open-end high-yield mutual funds had pretty bad outflows,” said Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co. “That seems, for the moment, to have ended. It could be at the moment or that moment could be very long.”

Investors are piling into bets on equities that track high-yield bonds, with BlackRock’s ETF absorbing $1.2 billion last week, the most since inception in April 2007. The total included a single-day record of $481 million on Feb. 16.

The Bank of America Merrill Lynch U.S. High Yield Index lost 11 percent over 12 months ended Feb. 11. It has since added 4.2 percent as sentiment improves. The average yield on the debt this fell Monday to 9.3 percent from 2016 high of 10.2 percent.

HCA Boost

Improving tone in the junk debt market is benefiting some issuers. Hospital operator HCA Holdings Inc. Tuesday shiftedthe mix of a financing by boosting the bond part of the deal to $1.5 billion from $1 billion and reduced loans it was was seeking by the same amount to $1.5 billion, according to a person with knowledge of the deal, who asked not to be identified because the information hasn’t been made public.

There were few things investors could do better with their money in the past three years than put it in stocks backed by the weakest balance sheets. That trade reversed to start 2016 as crude sank and global equities plunged into a bear market amid persistent concern that China’s slowing growth will spread. As those forces have eased in the past two weeks, stocks have rallied and junk-rated shares have drawn investor attention.

Junk stocks in the S&P 500equity benchmark, of which 14 percent are energy companies, have benefited from a rebound in crude. The price of oil has increased in six of the last seven days, and is up 31 percent to $34.38 a barrel since falling to the lowest level since 2003 on Feb. 11.

“Oil has been the culprit for high-yield, and it’s just a question of how they work through it,” said Manley. “Every dollar above $30 that it goes up is crucial. In a year, things will be better -- it’s just a question of getting from here to there.”

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