By Sridhar Natarajan at Bloomberg
The largest exchange-traded fund that buys junk bonds is flashing a potential warning sign that a three-month rally in the $1.4 trillion market is losing steam.
BlackRock Inc.’s iShares iBoxx High Yield Corporate Bond ETF has seen 27.8 million shares redeemed, or about $2.6 billion, in the last four days, according to data compiled by Bloomberg. Short interest in the fund climbed more than 80 percent since mid-April, according to financial analytics firm S3 Partners.
High-yield bonds have been benefiting from a turnaround in sentiment as investors embrace riskier assets amid signs of easing global monetary policy, rising commodity prices and inflows that came flooding back into the asset class. With anemic economic growth still the most likely outcome for the year ahead, some investors may be questioning the exuberance that points to annualized gains of more than 20 percent.
“We continue to make no secret of our distaste for corporate fundamentals,” Bank of America Corp. strategists led by Michael Contopoulos said in a note Thursday. Despite the rally, total returns in high-yield could be between zero and one percent, they wrote.
The asset class has gained more than 12 percent since the markets bottomed on Feb. 11, and is up 7.3 percent for the year, Bloomberg bond index data show.
The move in the $15.3 billion BlackRock ETF, which is identified as HYG, contrasts with muted outflows from the second-largest high-yield ETF. The $12.5 billion SPDR Barclays High Yield Bond ETF has seen redemptions of $245 million in the last week, according to data compiled by Bloomberg.
Shorting of HYG increased to more than $3.3 billion in just over two weeks, according to S3 Partners. Some long holders are also selling their positions.
“Institutions are not only selling their high-yield exposure, they are betting against it,” said Ihor Dusaniwsky, head of research at S3.
The outflows may be driven by one or more large institutional investors taking money out to participate in the new-issue market or shift cash into some less-liquid instruments, according to Peter Tchir, head of macro strategy at Brean Capital LLC.
"Both are ‘risk on’ type of moves," Tchir wrote in a note to clients. "The thing that makes most sense to me is someone wants to buy the new issues which are coming cheap and are well supported in the secondary market."
High-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P Global Ratings.
The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 junk-rated companies, jumped to the highest level in about a month. The gauge rises as the perception of creditworthiness deteriorates, and drops as it improves.