High-yield junk bonds and their ETFs attracting huge fund inflows

HIGH-YIELD bonds are having a moment, and so are the exchange-traded funds tracking them, as investors assess prospects for a brighter economic outlook and higher interest rates.

The US$22 billion iShares iBoxx High Yield Corporate Bond exchange-traded fund (ticker HYG) - the largest junk ETF - took in US$1.3 billion on Wednesday, the second-biggest single-day inflow ever, according to data compiled by Bloomberg.

The US$10 billion SPDR Bloomberg Barclays High Yield Bond ETF (ticker JNK) absorbed US$560 million, the most since last April. And the US$3.9 billion SPDR Bloomberg Barclays Short Term High Yield Bond ETF (ticker SJNK) saw a record US$228 million inflow.

The rush for junk is another manifestation of the reflation trade rippling across assets, as the global Covid-19 vaccine roll-out picks up speed and economic growth forecasts get upgraded.

That's pressured Treasury yields higher, denting the appeal of funds with longer duration - a measure of sensitivity to interest-rate changes.

That's boosted the appeal of high-yield ETFs - HYG has a duration of 3.6 years, compared to about 10 years for the US$44 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD), the largest investment-grade ETF.

"What we've had in bond markets for much of the year to date is a sell-off in duration, which has meant that high yield, which is high spread and low duration, has been the safer asset class," said Peter Chatwell, head of multi-asset strategy at Mizuho International.

"These flows reflect that, and we expect there will be further moves in that direction as US growth becomes more broad based and helps to support the rest of the world."

High-yield funds have proven to be a shelter of sorts as long-dated Treasury yields fluctuate near their pre-pandemic highs.

HYG has dropped one per cent over the past month, compared to a 3.6 per cent for LQD. SJNK, which has a duration of 1.8 years, is just about flat.

The inflow into HYG coincided with an uptick in bearish bets, with short interest as a percentage of shares outstanding rising to the highest level since last April this week, IHS Markit data show.

That suggests that some of the cash influx could be a result of the "create-to-lend" process - in which new shares are generated for investors to borrow and then sell short - but the bid into junk has been robust, according to Bloomberg Intelligence.

"If you look at some of the high-yield flows in global ETFs, they are still seeing outflows, so I'm thinking create-to-lend because of that divergence," said BI analyst Athanasios Psarofagis.

"But the flows are pretty widespread in the US, so it could be a little bit of both. We did get that nice market bounce, which tend to correlate with HYG inflows." BLOOMBERG