Over the course of the last two days, I’ve suggested that perhaps the junk bond bubble may have finally started to burst.
As noted on Wednesday, while analysts have grown more cautious of late about the prospects for HY given not only the mammoth spread compression we’ve seen over the past 12 months, but also the relative compression versus IG, my warnings have generally fallen on deaf ears as rampant risk-on sentiment and the assumption that riskier credits carry less rate sensitivity has kept a bid under the market.
But that bid looks to have been kicked aside by crude’s dramatic 2-day plunge which has hilariously served to erase all of oil’s post-OPEC-cut gains.
What, you might ask, has that meant for HY ETFs? Well, it’s meant losses and outflows.
Behold: this is what it looks like when people start selling their junk…
US HY experienced a $2.8bn (-1.2%) net outflow last week, the largest amount since November 2nd’s -$4.0bn (-1.75%) withdrawal. Almost all of these redemptions came from HY ETFs (-$2.5bn, -5.3%), which tend to be more institutionally driven and react more quickly to market events. And with 5yr treasuries hitting a 6 year high of 213bps today and causing the majority of March’s 89bps of price loss MTD, it is not surprising that ETFs experienced a pullback in new money. Also acting as a potential catalyst to these outflows was a plunge in WTI prices, which dropped 5.4% on Wednesday for their largest 1 day decline since February 2016. Finally, we think these redemptions were overdue given that February’s inflows pointed towards signs of a fatigued rally and a reluctance to continue investing in high yield.