Must-read: Why high yield bond funds experienced a major sell-off


Nov. 25 2019, Updated 12:00 a.m. ET

From June 30th to August 6th, high yield bond ETFs (HYG) experienced $3.7 billion of redemptions, and this included shorter maturity high yield funds which had been impervious to previous periods of outflows. Overall, since June 30th, the high yield bond market has lost about 2%.

Market Realist – The graph above shows the weekly flows as a percentage of assets under management for U.S. high yield bond ETFs. As you can see above, there was a sharp outflow of 4.3% in the week from August 1, 2014, to August 8, 2014.

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According to reports from Lipper, high yield bond (JNK) funds saw an outflow of a whopping $7.07 billion in the week ended August 6, 2014. ETFs represented 18% or approximately $1.28 billion of these outflows. The redemption figures have broken all past records, the highest of which was $4.63 billion in June 2013.

According to Lipper, high yield bonds have seen four consecutive weeks of outflows, amounting to $12.6 billion. Fund flows for 2014 have turned negative, with redemptions amounting to $5.9 billion—43% of which can be attributed to ETFs.

This decline in prices has pushed credit spreads (the additional yield over US Treasuries (IEF)) on high yield bonds out by 0.67%, and now spreads have reached more than 4% above US Treasuries (TLT) (SHY) for the first time since February this year. Will this bring investors back into the market? It is difficult to say, as the environment for credit risky securities seems to be more favorable than the recent sell-off implies.

Market Realist – Read on to the next part of this series to see how high yield spreads have widened and become relatively attractive.


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