Junk Bond ETFs fell to a 2-year low

Junk bonds and related exchange-traded funds plunged to their lowest level in two years this week as traders reduced exposure to this risky segment of fixed-income securities in anticipation of the Reserve’s hawkish monetary policy outlook. federal.

Since the beginning of the year, the iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) fell by 9.1% and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) fell 9.5%, dropping to its lowest levels since April 2020 on Monday.

Additionally, the two high-yield bond ETFs were among the most hated ETF games of 2022, with HYG recording $7.2 billion in net outflows and JNK recording $2.8 billion in redemptions, according to ETFdb data.

Meanwhile, the yield spread on the ICE BofA US High Yield Index, a commonly used benchmark for the junk bond market, widened to 405 basis points on Monday from 393 basis points last week. . Its biggest disparity since March 15, when the spread hit a 15-month high of 421 basis points, Bloomberg reports.

The widening spread between junk bond yields and safe-haven US Treasuries reflects heightened risk aversion in the current market environment.

Uncertainty has grown in recent weeks as markets grow weary of the Fed’s ability to properly handle a soft landing for a rapidly expanding economy and high inflationary pressures.

Many expect Fed officials to announce a 50 basis point interest rate hike and quantitative tightening, or cancellation of its bond-buying program, to combat the level of four-decade high inflation.

As a result, the tighter monetary policy outlook has weighed on the fixed income market, particularly riskier assets like speculative securities.

“Continued Fed Ferocity both growing adoption of 50 basis point moves and renewed interest in QT have helped push real and nominal yields to new highs,” Goldman Sachs says in a research note.

“This mix ultimately led to pressure on equities and credit, exacerbated by concerns about risks to growth,” the bank’s analysts added.

For more news, insights and strategy, visit the Fixed Income Channel.

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