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Tuesday, October 21, 2014

High Yield Bonds Individual Investors Selling and Professional Investors Buying Again ?

Two recent reports in the FT note the large swings in high yield bond markets, particularly in the high yield bond ETFs which offer an easy way for retail investors and traders to invest in the high yield market. The result is often high volatility and large moves in the prices of these bonds. Recent weeks have shown a large selloff, as occurred in August (graph below is of HYG the largest high yield bond ETF). At that time the selloff driven by retail investors and short term traders pushed prices down to levels that many professional portfolio managers saw as attractive. Many are expressing similar views in reaction to the recent selloff.

Ft Reports:(Oct 17) Junk bonds caught in flight from risk

A sell-off in US stocks this week hit the junk bond markets as investors shunned the riskier securities amid fears about the outlook for the global economy.....
Markets have stabilised after mutual funds and ETFs investing in junk bonds experienced record outflows.

Renewed selling this week has highlighted some of the potential pitfalls faced by holders of the securities – which are sold by companies with fragile balance sheets and a higher probability of default – in a risk-averse environment.
Investors withdrew a further $549m from high-yield funds and ETFs in the week ended October 15. That brings this year’s total outflows to $5.5bn.
However, the junk bond market still has many supporters. Mark Haefele, global chief investment officer at UBS Wealth Management, said the sell-off boosted the attractiveness on the debt.
With spreads on the bonds versus comparable US Treasuries at about 500bp and default rates still expected to remain low, total return on junk bonds could rebound and reach the 5-6 per cent mark in the coming six months, he said.
High-yield market analyst Marty Fridson estimated that, after being extremely overvalued for most of the year, the high-yield market had swung to “moderately undervalued”.
And this month Pimco said fundamentals remained compelling – given its view “for a lower-growth global economy and subdued interest rates over the foreseeable future – an outlook we call the New Neutral – the case for high-yield bonds is a compelling one, both as a tactical and strategic allocation”.

The FT also reported (Oct 20) that fickle retail investors as well as short term traders can produce large swings in the high yield market as they trade in and out of high yield bond ETFs

Embedded Investors turn to junk ETFs amid sell-off

Investors are increasingly turning to exchange traded funds to dip in and out of junk bonds in times of market stress, according to new research from Fitch Ratings....

Such ETFs give investors the ability to dart cheaply and easily in and out of assets that would be more difficult for them to obtain in the so-called “cash market”.
Fitch’s analysis finds that trading activity in junk, or high-yield, bond ETFs increased sharply during 2013’s “taper tantrum” as well as three shorter periods of market volatility in January, July and then in September and October of this year.
The research suggests investors may be using ETFs as a convenient way to express changing views on low-rated corporate debt at a time when liquidity, or ease of trading, in the cash market is believed to have deteriorated....

The amount of junk bonds traded rose to $8.6bn on October 15, up from a daily average this year of $5.6bn, according to Trace data.
The amount of shares traded of BlackRock’s high-yield corporate bond ETF, known as HYG, reached more than $1bn on the same day, up from an average $5.6m.

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