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U.S. high yield bond ETFs see record outflows in January -Breaking


© Reuters. FILE PHOTO: Specialist Trader working in a New York Stock Exchange booth (NYSE) New York City U.S.A. January 25, 2022. REUTERS/Brendan McDermid

By Patturaja Murugaboopathy

(Reuters) – U.S. high-yield bond exchange-traded funds experienced record monthly outflows during January, as investors abandoned assets that could be affected by market volatility and aggressive rates rises by Federal Reserve.

Refinitiv Lipper reports that the January outflow from U.S. high-yield bond ETFs was $6.5 billion, which is the largest ever recorded.

(Graphic: Monthly flows into U.S. high yield bond ETFs:

High yield bonds, which include both long-dated and credit spread yields, are more sensitive than other assets to Fed policy. Both should decline as the Fed tightens policies,” stated Julian Brigden of Macro Intelligence 2 Partners. He is a president of research firm Macro Intelligence 2 Partners.

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The Fed is on an acceleration path to withdrawing stimuli and increasing rates immediately as March. However, Wall Street analysts expect the Fed to raise rates at least seven more times this year.

The ICE (NYSE 🙂 BofA U.S. High Yield Index was a benchmark used in the market for junk bonds. In January it fell by nearly 3%, which is the greatest drop since March 2020’s loss of 11.7%.

Index’s option-adjusted spread measures the premium that riskier companies must pay in comparison to the amount the government pays. It was 310 basis point earlier.

The iShares iBoxx$High Yield Corporate Bond Exchange Fund led the way with $3.5B in January outflows, while SPDR’s Bloomberg High Yield Bond ETF (SPDR) and Xtrackers USDHigh Yield Corporate Bond Bond ETF saw net sales of $707M and $824M, respectively.

(Graphic: Top 10 outflows from U.S. high yield bond ETFs in Jan.:

Adam Coons from Winthrop Capital Management, a portfolio manager based out of Indiana said that the iShares iBoxx high yield corporate bond ETF shows a 90% correlation to decline markets. The S&P 500 stock index lost 5.3% in January, its biggest monthly drop since the pandemic took hold in March 2020.

He said that if an investor believes the fixed income allocation is the safety asset, and their stocks sell off at the same moment as they see their portfolios in red, it can cause sticker shock.

“As long the VIX is above 20, we think high yield ETF flows won’t be affected.”

At the end of the last month, the – Wall Street fear gauge- reached a nearly 1-year high at 31.96.

Bryce Doty is a senior portfolio manager for Sit Investment Associates. He said that he likes the combination of cash-like ETFs and floating rate bank loans.

Our ultra-short ETF is 70% invested into floating rate bonds of 0.8 year duration with an average quality rating single A. “So we like to have a mixture of high and low quality floating rate bonds here,” he stated.

However, analysts feel that high yield bonds may be attractive right now, after the January selloff. This is due to their lower valuations.

Historical records have shown that retail investors sell at the bottom, and then buy up at the top. “We are witnessing the same phenomenon in this downturn,” Winthrop’s Coons said.

In the face of declining yields, “we are buyers non-levered high return bond funds.” We are particularly interested in ETFs trading at a discount relative to the funds’ NAV.