Why there was significant sell-off in high yield bonds
Must-know: Is investor fatigue setting in? (Part 4 of 5)
Nonetheless, over the past two weeks, $4 billion has come out of high yield mutual funds and exchange traded funds (or ETFs). We saw $1 billion leave high yield ETFs last week alone. The recent selling has pushed yields up around 0.40% from their June lows.
True, high yield has seen significant inflows over the past several years, a result of investors’ quest for yield in a low interest rate environment. No one would describe it as cheap.
Market Realist – The last three months have seen an increase in yields and a corresponding fall in prices of high yield bonds (HYG) and the ETFs tracking them. According to research by Lipper, mutual funds and ETFs tracking high yield bonds (JNK) saw $1.68 billion in redemptions in the week ending July 16, 2014. This has been the highest such outflow since August, 2013. Almost 64% of the withdrawals can be accounted for by ETFs investing in high yield bonds.
Market Realist – The last three years have seen a massive rally in high yield bonds as the yields for government bonds (TLT) (IEF) have been at historical lows and investors have pumped their money into high yield bonds as an alternative to investment grade bonds like the iShares Core U.S. Aggregate Bond ETF (AGG). The tides seem to have turned now as investors are looking to exit high yield bonds. Both the SPDR Barclays Capital High Yield Bond ETF (JNK) and the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) are trading at a premium to the values of the bonds underlying the funds. This is despite the substantial outflows that the funds have been facing. Historically, trading at a premium has never boded well for either HYG or JNK. Both funds have been depreciating in the past month. The previous graph shows the price performance of both JNK and HYG year-to-date (or YTD).
Read on to the next part of the series to understand the outflows from high yield bonds in the current context.
Browse this series on Market Realist:
