This has never happened before…
Blackrock’s broad bond-market ETF (AGG) suffered a nearly $2 billion outflow yesterday – the most ever…
And, as Bloomberg’s Lisa Abramowicz reports, it appears that money is flying out of corporate debt, from the riskiest to the safest bonds, at least based on ETF flows.
These are pretty huge weekly outflows among the biggest credit ETFs, and they seem to be accelerating:
All fixed-income ETFs have seen $5.5 billion in outflows in the past week, “about 4 to 5 times worse than any other week in recent memory,” according to Bloomberg Intelligence’s Eric Balchunas.
“The ETF flows are pretty volatile, with professional speculators contributing a lot of the volatility,” said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. “Those up and down swings have washed out over longer periods.”
As Abramowicz asks, the question is: are these flows a harbinger of more pain in U.S. corporate debt as benchmark Treasury rates rise? Right now it seems like this is a growing risk, since investors aren’t getting compensated that much for the extra risk they’re taking to own corporate debt over U.S. government bonds – especially given how high corporate leverage has become…
However, Fridson remains convinced this is a storm in a teacup and surging leverage is nothing…
“Forecasts are for default rates to be lower over the next 12 months than over the last 12 months, so investors are not too worried,” said Fridson.
We wonder what those forecasts were like in 2007?
As BofA notes, HYG was one of the primary casualties among risky assets last week (and that pain is continuing). For instance, its 1.4% sell-off since 1-Oct-18 represents a 3.4 sigma drawdown on a vol-adjusted basis (near historic records)…
HYG has done worse less than 10% of the time (using rolling 1w returns), and its move last week outperformed its typical beta vs. SPY, IWM (small caps) and LQD (IG credit)… In other words, the selling pressure is HY bonds is notably more aggressive for now than in the equity and IG credit markets…
But that is sparking some notably wide divergence from equity markets…
Stocks have only just begun to catch down to reality.
“Corporate earnings will be a problem going forward,” said Noel Hebert, high-yield strategist at Bloomberg Intelligence. “With tailwinds gone and with headwinds like tariffs and full valuations already, high yield will be adversely impacted — even with favorable technicals — if equities get hit.”
And finally, if you’re worried enough yet that the nirvana narrative in US corporate credit is not cracking, the breadth in the US Corporate High Yield Bond market has never…ever… been worse…
Yep – more new 52-weeks lows for HY bonds than in 2008!
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