Junk-Bond ETFs Under Fire as Risk-Off Sentiment Spreads

Updated on
  • Rising rates could weigh on junk debt: Eaton Vance’s Stein
  • Emerging-market bonds also come under pressure as yields spike
Eric Stein of Eaton Vance discusses high-yield bonds and market volatility.

Investors pulled $2.2 billion from global exchange-traded funds that track high-yield bonds last week as doubts mount about the sustainability of a rally that has compressed yields to multi-year lows.

Dollar-denominated funds suffered the heaviest withdrawals. The SPDR Bloomberg Barclays High Yield Bond ETF, ticker JNK, was hit Friday with its biggest daily redemption in five years, of $1.2 billion. The iShares iBoxx High Yield Corporate Bond ETF, ticker HYG, lost $726 million for the week.

Concerns are mounting that investors won’t be compensated for the risk of default as higher benchmark rates make refinancing more costly. Jitters spread to other assets, as yields on emerging-market bonds spiked and the cost of default insurance for U.S. investment-grade debt rose to the highest in six weeks.

“With spreads tighter, the chance that investors earn their coupon is certainly lower than what it was a year or two ago,” Eric Stein, co-director of global income at Eaton Vance Corp., said in an interview with Bloomberg TV. “If we have an inflationary world with higher rates, or risk-off and deflationary world, that could be challenging for high-yield.”

Even after a selloff last week, yields on junk bonds are still about three percentage points below a two-decade average.
Collective trading in junk-bond ETFs on Friday reached $5.3 billion worth of shares, more than any U.S. stock, according to Bloomberg Intelligence. Junk-bond ETFs typically go through a “rough patch” where surging volume accompanies a drop in prices once every 12-18 months, analyst James Seyffart said in a report, adding that “these periods typically don’t last long.”

— With assistance by Joe Weisenthal, and Scarlet Fu

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