Investors fled bond funds last month on fears of the possible start as soon as this month to the Federal Reserve’s "tapering" policy amid steady, if also slow, growth. But pockets of the fixed-income market, notably senior loans, were actually helped by views that the Fed’s quantitative easing bond-buying program might start to wind down.
Last month, investors trimmed interest-rate risks and bailed out of Treasurys as signs of a recovering U.S. economy began to take further shape. If today’s ADP jobs report showing 176,000 new U.S. jobs were created last month is any indication of how the official U.S. monthly jobs report will look on Friday, then the likelihood of the Fed making its move perhaps at the end of its Sept. 18 policy meeting is looming even larger in investors’ minds.
Funds such as the iShares 3-7 Year Treasury Bond ETF (IEI | A-77) and the iShares Short Treasury Bond ETF’s (SHV | A-56) suffered redemptions in August of $2.34 billion and $937 million, respectively, according to data compiled by IndexUniverse.
Corporate bond funds such as the iShares iBoxx $ Investment Grade Corporate Bond (LQD | B-62) and the iShares iBoxx $ High Yield Corporate Bond (HYG | B-64) fared no better, experiencing outflows of-$1.29 billion and $831 million, respectively.
All told, some $6.7 billion flowed out of U.S. fixed income last month, and overall investors yanked more than $17 billion out of the U.S. ETF market last month. Between those redemptions and a pullback in the S&P 500 Index, total U.S.-listed ETF assets fell in August by more than 3 percent to $1.487 trillion from $1.534 trillion in July.
But not all fixed income funds were in the black. Two funds: the Vanguard Short-Term Bond ETF (BSV | A-57), and the PowerShares Senior Loan (BKLN | C-N/A), made gains of $424 million and $373 million, respectively.
As its name implies, BSV holds a mix of investment-grade, dollar-denominated debt issued in the U.S. with maturities of one to five years. But the fund held about 39 percent of its total portfolio in notes maturing in three to five years, as of July 31.
That differs from SHV’s portfolio, which is comprised almost entirely of Treasury bills maturing within a year, according to data posted on iShares’ website.
Benefitting From The Bond Shakeout
BKLN tracks an index canvassing a part of the fixed-income world that’s not interest-rate sensitive the way most debt is. Dubbed senior loans, which including leveraged, bank and floating-rate loans, BKLN is the first such ETF to come to market. It gathered $373 million last month, and its assets are more than $5 billion—a clear sign that the fund is enjoying its first-to-market status. The fund has pulled in upwards of $4 billion this year, according to IndexUniverse’s “ETF Fund Flows” tool.
These loans tend to move contrary to interest rate hikes, so rising- and stable-rate environments have typically been the time when senior loans have outperformed other traditional fixed-income assets, according to Bill Housey, senior portfolio manager of the leverage finance team at First Trust Advisors.
“When rates are declining, that means that, typically, defaults or corporate defaults are rising and rates are falling,” Housey said in an interview with IndexUniverse.
“If we’re really at this inflection point where interest rates are expected to begin to rise and then level out for some period of time, then that tends to be a very good time to lend to companies.”