High yield ETFs see large outflows on Fed rate increase

Mar 21st, 2017 | By | Category: Fixed Income

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High yield corporate bond funds suffered large outflows in the first two weeks of March as an interest rate rise in the US and a sinking oil price drove investors away from the asset class.

High yield ETFs see large outflows on Fed rate increase

Investors withdrew $5.7 billion from high yield bond funds in the week up to 15 March.

Investors pulled out $5.7 billion from junk bond funds in the week up to 15 March, according to EPFR Global, a provider of flow data on ETF and mutual funds. The outflows represented a reversal of sentiment, compared to inflows of more than $11bn since December as, along with equities, the asset class had been a major beneficiary of newly-elected US President Donald Trump’s promise to reform tax and cut red tape.

Although BlackRock data found that year-to-date inflows into globally-listed high yield corporate bond ETFs amounted to $2.2bn by the end of February, one of the largest funds in the market – the iShares Euro High Yield Corporate Bond UCITS ETF (LON: IHYG) – shed $101.6 million in the week to 10 March – one of the top ten outflows amongst all fixed income ETFs in Europe that week.

ETF performance in the asset class took a significant setback this month – the iShares Global High Yield Corporate Bond UCITS ETF Dist (LON: HYLD) fell 3% in two weeks to 17 March – a U-turn after generating 2.3% in 2017 until that point.

Its US-focused counterpart, the iShares USD High Yield Corporate Bond UCITS ETF Dist (LON: IHYU), fell 2.3% from 1 to 14 March, wiping any gains made to that point in 2017, before recouping around half the losses over the rest of last week.

Patrick Mattar, iShares EMEA Capital Markets, pointed to IHYU’s bounce-back and inflows after the Fed announcement.

“A weaker dollar has triggered a rally in commodities including oil, prompting some investors to return to US high yield bond ETFs that have experienced a sell-off so far in March,” he said.

The US Federal Reserve announced last week that it would increase short term interest rates to a range of 0.75%-1.00%.

High yield in the US had been one of the best fixed income investments in 2017, outpacing US sovereign debt for eight months in a row.

In 2016, high-yield US corporate debt generated returns of 17.5%, versus the S&P 500’s 12%, as reported by the Financial Times.

But in March Goldman Sachs analysts warned that “the value proposition of high-yield bonds has significantly diminished over the past year.”

Earlier this month, the WTI crude oil price also became more volatile, falling back below $50 per barrel for the first time in 2017. This movement affects junk bonds as a significant proportion of high-yield bond indices consist of energy companies. (IHYU holds 16.2% in the energy sector.)

However, underpinned by relatively solid economic fundamentals, the recent sell-off in high-yield bonds could represent a buying opportunity for investors with an appetite for risk.

The three largest ETFs in Europe that track global, US and European high-yield corporate debt are HYLD, IHYU and IHYG respectively. They are all physically replicated, each costs 0.50%, and have combined assets of more than $10bn.

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