High Yield Bond ETFs Struggle as Uncertainty Persists

Sticky inflation and the Fed’s next move signal trouble for riskier bonds.

Reviewed by: Shubham Saharan
Edited by: Shubham Saharan

Investors are pulling out of high yield bond exchange-traded funds as lackluster economic data erodes values in fixed income markets.  

Last week, the iShares iBoxx USD High Yield Corporate Bond ETF (HYG),  the SPDR Bloomberg High Yield Bond ETF (JNK) and the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) collectively shed $3.8 billion, according to ETF.com data. So far this year, HYG has bled $214.4 million, while JNK lost $111.8 million, the data shows.  

The outflows reverse much of the money that went into so-called junk bond funds last year, when investors piled into high yield bond ETFs. JNK pulled in $3.4 billion in the last six months of 2022 alone, while HYG took in $3.8 billion, according to ETF.com data.   

Still, the outflows aren’t surprising strategists and fixed income experts who say they are seeing increased hawkishness among market participants. This comes as the Federal Reserve decides whether to tighten the money supply as the economy proves stubbornly resilient despite the central bank in the past year raising rates to their highest in 15 years.  

“There's obviously been a very big swing in terms of market outlooks and assets as a result over the last month” thanks in part to “the incredible strength of the job market,” Kristy Akullian, senior iShares strategist, told ETF.com. “There's just been an increasingly hawkish tone.” 

She added that outflows in bond ETFs have been seen across credit grades, and noted that there is a preference for products at the front end of the curve and Treasury exposure.  



Data from the Bureau of Labor Statistics released Tuesday showed consumer prices rose 6.4% in January compared with a year ago, hotter than the 6.2% expected by analysts polled by MarketWatch. While equity markets seesawed after the data was released, losses remained muted. Meanwhile, fixed income markets saw what Akullian referred to as “pretty drastic repricing.”  

The yield on the two-year Treasury note leapt to 4.62% on Tuesday, its highest level since November. On Wednesday, the 10-year jumped to 3.81%, its highest point this year.  

“It’s not surprising to see volatility of cash flows in to or out of fixed income sectors—such as high yield—that are most exposed to uncertainty and volatility related to evolving economic conditions,” said Jeff Johnson, head of fixed income product at Vanguard, in a note to ETF.com.  

On Feb. 1, the Fed posted a 25 basis point increase to its federal funds rate, bringing it to a range of 4.5% to 4.75%. Officials noted that additional increases would be warranted and reiterated their commitment to bringing inflation down to 2%.  

Following the latest inflation news, Federal Reserve Bank of Richmond President Thomas Barkin warned that the central bank may look to increase its terminal rate if inflation doesn’t show signs of easing.    



In recent months, credit spreads have also tightened, indicating that investors expect lower default and downgrade risk. According to Johnson, spread tightness may leave little room for downturns in credit markets.  

“Current valuations are high and don’t leave us much room to absorb any negative surprises, which could come from weaker-than-expected economic conditions, more aggressive monetary policy that leaves financial conditions tighter for longer, or geopolitical events,” he said.

According to a mid-January report by Fitch Ratings, high yield defaults could range between 3% and 3.5% this year, more than twice the 1.3% seen in 2022.  


Contact Shubham Saharan at[email protected]         

Shubham Saharan is a markets reporter at etf.com. Before joining the company, she reported for Bloomberg and the Financial Times. Saharan is a graduate of Barnard College of Columbia University.