Fitch: High-Yield Fund Inflows Reinforced By ETF Expansion (JNK, HYG)
The first quarter saw very strong retail investment flows into high-yield debt securities and the rapid growth of exchange-traded funds (ETFs), as bond investment vehicles appears to be a major driver of the market’s growth. Fitch believes leveraged bond ETFs are improving liquidity and should broaden the high-yield investor base. However, the trend may also contribute to market volatility and potentially de-link some aspects of bond pricing from credit fundamentals.
Retail investors hungry for yield in a low interest rate environment directed significantly more cash into leveraged bonds and loans during the first quarter. We estimate that total retail fund flows into high-yield bonds reached $15 billion in the quarter ended March 31. Of that total, we believe 20% or more probably resulted from new flows into bond ETFs. ETFs such as Black Rock’s “(NYSEARCA:HYG)” and Barclays’ “(NYSEARCA:JNK)” funds, which are designed to track major high-yield indices, continued to capture a large share of new flows, but the number of bond ETFs is growing quickly.
Expanded use of high-yield ETFs as a short-term trading platform will likely fuel more market volatility, particularly in periods of macro stress, when risk re-allocation could drive big swings in ETF flows. In periods of asset inflows such as the first quarter, this should support tighter spreads on new issues, particularly for large leveraged issuers whose bonds must be acquired by ETFs.
At the same time, forced selling could be exacerbated by hot money flows during periods when fundamentals are weakening and investors are pulling back from riskier asset classes. This has the potential to reinforce liquidity-driven price moves in high-yield bonds that may have little or no relation to changes in credit fundamentals.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.