A pair of exchange-traded funds tracking corporate credit saw a nearly $2 billion flight after data underscoring jobs strength solidified bets the Federal Reserve will resume its interest-rate hikes.
(Bloomberg) — A pair of exchange-traded funds tracking corporate credit saw a nearly $2 billion flight after data underscoring jobs strength solidified bets the Federal Reserve will resume its interest-rate hikes.
The $13 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) saw outflows to the tune of $1.13 billion in the latest session for which those figures are available. That’s the biggest withdrawal since March, according to data compiled by Bloomberg. Investors also pulled some $760 million from the $35.5 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).
Markets were shaken Thursday after stronger-than-expected private payrolls data bolstered bets the Fed is on track to tighten this month and mull another hike as soon as September. Swap traders are almost fully pricing in a quarter-point increase on July 26, and about 40% odds of another one by year end.
“Outflows from credit make sense based on the market’s read that stronger job growth will result in more Fed hikes,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “Spreads are already quite tight, and now you have increased pressure from higher rates that could add further stress to companies at a time when lower quality companies are starting to struggle a bit.”
Corporate credit has failed to live up to lofty expectations of double-digit returns so far this year, fueling a string of bearish bets into the second half of 2023.
Global corporate debt has advanced nearly 2.5% after aggressive interest-rate hikes. That’s a heavy blow to money managers that were banking on gains of more than 10% for high-grade bonds in 2023, predicted by the likes of Bank of America Corp., which has since revised its year-end target down to about 8%.
Read: Junk-Bond Funds Bleed Cash While Investors Move Into High Grade
Bond investors got limited relief from Friday’s employment data showing a slowdown in job creation, as robust wage growth helped send 10- and 30-year Treasury yields to their highest levels of the year.
“Markets are watching for any indication of how far the Fed is likely to go,” said Michelle Cluver, portfolio strategist at Global X ETFs. “The stickiness of core inflation is a concern, making the tight labor market and wage pressures an important consideration for the Fed.”
The withdrawals from credit ETFs could also be explained by the fact that some investors are looking to take some risk off the table given the still appealing cash returns, according to George Cipolloni, portfolio manager at Penn Mutual Asset Management.
“Investors are not required to take credit risk to earn 5%+ yields,” he said. “These rates are as attractive as they have been since 2007.”
–With assistance from Olivia Raimonde, Christopher DeReza, Allan Lopez and Gowri Gurumurthy.
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