There’s consternation in high yield bonds. Or at least that’s the impression one gets from a quick glance at flows data for the most popular junk ETF.
High yield credit has, of course, benefited handsomely from the Fed’s unprecedented foray into the corporate bond market, which includes a backstop for fallen angels as well as ETF purchases. The Fed’s ETF portfolio includes the iShares iBoxx High Yield Corporate Bond ETF, the most popular junk product for the masses.
On Monday, that product witnessed $1.06 billion in outflows. It was the largest one-day exodus since the onset of the pandemic in February.
Flows into credit have been staggering in 2020. Investors’ insatiable appetite and the temptation to invest alongside Jerome Powell helped catalyze a veritable bonanza in the primary market, where investment grade companies have borrowed nearly $1.6 trillion this year.
High yield issuance has been similarly robust.
But cracks in risk sentiment tied to this month’s equity selloff appear to be spilling over into credit now. Junk spreads widened some 30bps over the past three sessions, with 26bps coming on Monday alone.
Still, at just ~540, spreads are nowhere near the distressed levels hit in March.
Many expect defaults to rise in the quarters ahead. Even as the US economy recovers, the rebound will likely be uneven and is sure to be accompanied by various manifestations of structural damage incurred from the lockdowns and this year’s oil price collapse.
With hopes for additional fiscal stimulus fading in the face of partisan rancor, it may once again fall to the Fed to support the market in the event credit spreads were to balloon wider as a result of election turmoil, higher equity volatility, or a slower than expected recovery.
And therein lies the problem for anyone inclined to be bearish corporate credit — unless you’re talking about lower-rung junk, you’re effectively betting against the Fed.
Traditionally, that is a losing proposition. But I suppose you never know.