HYG, JNK Bleed Billions as High Rates Persist

Investors pulled billions of dollars from two of the biggest junk bond funds in the past week amid fears that persistently high long-term interest rates are flashing signals for a coming economic tailspin.  

The biggest high-yield bond fund, the $12 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG),saw about $1.5 billion in outflows in the past week, including an eye-popping $1 billion in outflows in a single day on Oct. 5, according to etf.com data. Meanwhile, investors drained $1.3 billion from the SPDR Bloomberg High Yield Bond ETF (JNK) in the past week. 

High yield bond ETFs took off in recent years as investors sought an easy way to bet on the potential for double-digit yields, despite the added risks that come with greater chances of default the bonds carry. Soaring yields have spooked junk bond investors, who have responded by pulling billions from the funds. 

“The outflows are being driven by investors' worries that the recent spike in long-term interest rates might derail the economy, leading to higher rates of default by lower-rated bond issuers,” etf.com analyst Sumit Roy said.  

The Federal Reserve has signaled they will keep rates high to combat persistent inflation. Yields climbed further after Friday’s jobs report showed 336,000 new jobs were added in September.  

HYG, JNK Up This Year, Down Past Month 

HYG, which tracks corporate credit, also saw $10 billion in trading volume on Oct. 4, the fund's biggest trading day ever since it launched in 2007, Bloomberg analyst Eric Balchunas tweeted this week. The fund is up 3% this year, while also slipping 2% in the past month.  

The $6.89 billion JNK fund offers exposure to so-called junk bonds since it invests in middle rated bonds that have at least one year to maturity. Year to date, the fund is up 3.7%, but in the past month it’s declined 2.8%.  

High Rates Spook Bond Investors 

The year so far has been a rough one for corporate credit funds. HYG and its sibling fund, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), saw a combined $2 billion in outflows in July after a strong jobs report suggested the Fed would boost rates again, Bloomberg reported. Worries of further rate hikes persist after the latest jobs report.  

Bank of America previously projected gains of over 10% for corporate bond funds in 2023 but has since lowered their target to 8%.  

“This week, investors seem to be taking a glass half empty view of things, though that could certainly change in the future,” said Roy.  

The outflows from junk bonds come as the iShares 20+ Year Treasury Bond ETF (TLT) continues to see record setting inflows despite dismal performance.  

Contact Lucy Brewster at [email protected].