High Yield Bond ETF Outflows Signal Summer Lull

Investors are taking risky assets off the table as the warmer months set in

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

The summer lull is already beginning to set into markets, and demand for risky-type assets such as high-yield bonds has been forecast to decline significantly in the months ahead.

After piling into high-yield bond funds such as the iShares Euro High Yield Corporate Bond UCITS ETF (IHYG) and the iShares J.P Morgan $ Emerging Markets Bond UCITS ETF (SEMB) in recent years, searching for yield in an era of ultra-low rates, investors have been flocking out of these funds since March. The pace of redemptions has been picking up in earnest this month, with $122 million flowing out of these funds in one week to 16 June, according to Deutsche Bank data.

Even more telling is to look at the top inflows to fixed income ETFs over the same timeframe – the Lyxor UCITS ETF Smart Cash C-EUR (SMART) took in over $500 million.

Fed Rhetoric Driving Demand

The Federal Reserve’s suggestion in March—and reiterated last week—that despite its more dovish stance on the long-term outlook for the U.S. economy, it would still consider a rate hike in the fall most likely a catalyst for the recent outflows. Consensus is fuelling expectations for a September uptick in rates. Investors are therefore worried about the impact this could have on high yield debt across the globe.

In simple terms, higher rates make safer debt such as U.S. Treasuries and UK gilts more appealing, and the risk associated with owning junk bonds less so.


“We are becoming vulnerable to some sort of summer risk-off trade,” Scott Minerd, chief investment officer of U.S.-based asset manager Guggenheim, said in his most recent market commentary on Monday. “While I remain generally positive on U.S. equities over the next two to three years, I think it is very likely that we are going to have some sort of a nasty market event during the course of the summer.”

Increasing Cash And Govt Debt

“At this stage, it would be prudent to prepare for a risk-off period by the opportunistic liquidation of lower-quality high-yield and bank loans, which have appreciated in price this year, and selectively taking gains in stocks while increasing holdings in cash and Treasury securities, as a precaution in preparation of a potential looming summer dislocation,” he added.

Inflows to 16 June saw investors favour shorter-dated bond ETFs, which are less sensitive to rate hikes. The iShares $ Treasury Bond 1-3yr UCITS ETF (IBTS) gathered $30.6 million and the iShares Euro Corporate Bond 1-5yr UCITS ETF (SE15) saw over $100 million of inflows.

As one Street One Financial trader put it today, there’ve been “consistent sellers” in high-yield corporates lately.

The selling has come on the back of more negative performance. The emerging markets fund SEMB is down over 5.6 percent in three months, while high yield corporate bond IHYG has fallen over 0.6 percent in the same timeframe.

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.