On Monday, during the worst day for US equities of the year, junk bond spreads (on Bloomberg’s index) blew out some 40bps. On a percentage basis anyway, that was the most in 12 years.
At the same time, everyone’s favorite liquidity-mismatched high yield ETF had its worst one-day plunge since November 2016.
Things calmed down over the next several days, but junk may find itself on the back foot again to close the week amid jitters tied to reports that the US is freezing license applications for US tech firms to resume sales to Huawei.
As Bloomberg notes, “market volatility has started taking casualties as two issuers – US Farathane LLC (a maker of plastic auto parts) and Sirius Minerals – pulled high yield offerings this week”.
The palpable jitters showed up in the flows data, that’s for sure.
Lipper pegged outflows from high yield funds in the week through Wednesday at $4.07 billion, the largest weekly exodus since October. Meanwhile, EPFR data for US-domiciled funds showed high yield funds hemorrhaging $3.75 billion, the biggest outflow from junk since December.
Obviously, market volatility tied to renewed trade tensions between the US and China has investors frustrated. The attendant economic uncertainty ostensibly raises the odds of a US recession and nobody is particularly excited about seeing what happens to credit when the cycle finally turns on the longest expansion in US history (although there’s a good argument to be made that investment grade is paradoxically more risky this time around).
“HY fund flows [have] turned sharply negative, with the combined ETF + open-ended exodus exceeding $1 billion for four days in a row starting last Friday”, BofA’s Oleg Melentyev wrote Friday, adding that this “registers as the second-fastest pace of outflows from HY in three years, just behind February 2018 $5 billion withdrawal”.
So, is there any good news here? Well, yes. Things are cheaper now. “Value is returning to HY at these wider levels as tight spreads earlier this year were the most important obstacle for us to be more comfortable with taking more credit risk”, Melentyev went on to say.