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Gains for high yield ETFs supported market fundamentals

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Gains for high yield ETFs supported market fundamentals PART 1 OF 1

Gains for high yield ETFs supported market fundamentals

Gains for high yield ETFs supported market fundamentals

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High yield ETFs, such as iBoxx $ High Yield Corporate Bond Fund (HYG) and SPDR Barclays Capital High Yield Bond ETF (JNK), have maintained an upward trend since the dip in early June.  While many investors believe that this trend may not be supported for much longer, there is a perplexity in the bond markets; as more investment dollars enter the bond markets, this tends to increase the performance of existing bond funds. Last week the high yield funds posted an inflow of USD52 million, putting an end to the three consecutive weeks of outflows that had investors worried.  YTD inflows stand at USD23.5 billon vs. the USD3.5 billion through the same period in 2011.  High Yield issuance for 2012 is currently on track to post a record year.  The graph below shows YTD issuance ahead of the full year issuance for 2011 and only 10 billion behind 2010 (which should be easily surpassed given that the weekly average issuance over the past six weeks has averaged USD12 billion per week).

Fund flows are a key driver of the high yield capital markets and of the debt capital markets in general, and refer to the money invested by institutional investors into funds that invest in corporate debt. The leveraged loan market observes the mutual fund inflows while the high yield market observes the high yield funds inflows. When fund flows increase, there is more liquidity available to buy debt, which translates into increased demand and therefore cheaper rates (referred to as yield) paid to the investors by the issuing companies. Rates behave inversely proportional to the face value (price) of the debt, so when rates decrease, the price of the debt instruments (in this case high yield bonds) go up. In the opposite scenario, when investors withdraw funds from the market, the issuers need to pay higher rates to attract the investors and compete for their dollars. As long as fund flows continue to support the high yield rally, high yield bond focused ETFs such as iBoxx $ High Yield Corporate Bond Fund (HYG) and SPDR Barclays Capital High Yield Bond ETF (JNK) will continue to be supported.

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