23 July 2018

Investors Continue To Abandon Risky Bond Funds

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The exodus from junk-rated debt funds accelerated in the first quarter as rising interest rates cut into investors’ appetite for taking on greater credit risk.

Investors in the first three months of 2018 yanked $6.5 billion from the five largest exchange-traded funds that invest in bonds issued by less creditworthy companies, according to FactSet. March was the fifth consecutive month of outflows from high-yield ETFs.

Riskier debt has become less appealing as interest rates rise and volatility returns to the stock market. The average yield premium over Treasurys, a measure of how much an investor is paid to take on the increased risk of default, declined to 3.11 percentage points in January, the lowest since 2007, from 8.39 percentage points in February 2016. Falling demand for high-yield debt has since nudged the spread up to 3.54 percentage points.

The iShares ETF iBoxx High Yield Corporate Bond ETF has declined 1.9% since the start of the year and the SPDR Bloomberg Barclays High Yield Bond ETF fell 2.4% State Street Corp. , one of the largest owners of the SPDR high yield ETF, began selling off some its junk debt investments in November as spreads tightened, said Matthew Bartolini, head of SPDR Americas Research. The exposure to high-yield bonds in its tactical asset allocation portfolio was reduced to 4% from 6%, he said. “Spreads had fallen considerably and our expectations were for lower returns in high yield,” Mr. Bartolini said. “We know other managers were doing the same.”

As investors pulled their money out, bets against high-yield ETFs swelled to a record.  At the end of February, nearly 40% of the outstanding shares of the $14.2 billion iShares iBoxx High Yield Corporate Bond ETF were tied up in wagers on falling prices. The shares had fallen to 31% as of March 15, the most recent data available, according to FactSet. One in five shares in the $9 billion SPDR Bloomberg Barclays High Yield Bond ETF were being used to short.

“You have institutions, funds and family offices that own high-yield credit and they like the credit, but if there’s a hit to the market value of their holdings, they want to make sure that they have an offset,” Mr. Holzer said.

Corrections & Amplifications 
When the yield on junk debt is 3 percentage points to 5 percentage points higher than the yield on risk-free government bonds, the anticipated annual return is about 5%. An earlier version of this article incorrectly cited the range as 3 basis points to 5 basis points. (March 31)

Click here for the original article from The Wall Street Journal. 

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