Bonds: High Yield

According to research from data analytics company Coalition Greenwich, the influence of some corporate bond ETFs on their underlying holdings has increased, as the electronification of fixed-income trading has created an upheaval in how bonds are traded. The firm found that the trading volumes of 12 of the largest corporate bond ETFs rose from 18% of the turnover in their constituent investment grade and high-yield bonds in 2021 to 23% in 2022. In addition, the proportion was even more marked when Coalition Greenwich narrowed its focus to the five high-yield ETFs in its study. In this case, it found average daily notional volume soared from 30.5% of the underlying bonds in 2021 to 47.4%. What this means is that ETFs accounted for nearly half of the daily traded value of the underlying bonds. Kevin McPartland, head of market structure and technology research at Coalition Greenwich stated, “In the last three years everything has changed, all bond market participants now traded at least some of their volume electronically, which was transforming the market.” The increasing share of volume traded is an indication of a revolution in which corporate bonds are traded. Fixed-income ETFs have helped to increase the electronification of the corporate bond market, which has resulted in better price discovery, liquidity, and tighter spreads.


Finsum:According to research from data analytics company Coalition Greenwich,the trading volumes of some of the largest corporate bond ETFs are rising and accounting for a higher daily traded value of the underlying bonds.

Warnings are piling up for high-yield bonds. The asset class could take a big hit if the Fed’s rate hikes push the U.S. economy into a recession, sparking rating downgrades and defaults. But that hasn’t stopped investors from piling into junk bond ETFs. In fact, of the nearly $11 billion that flooded into fixed-income ETFs over the past week, $1.6 billion flowed into the iShares iBoxx High Yield Corporate Bond ETF (HYG), the most of any fund, according to Bloomberg data. It’s difficult for investors to resist yields near the highest levels of the past decade according to CreditSights. Zachary Griffiths, a senior fixed-income strategist with CreditSights, said the following on Bloomberg Television, “Yields look too good to be short. The potential for returns in the 12% area makes high-yield an attractive place to be and we’re also more optimistic on the economic front, which is very important for our call.” With money flowing into high yield and other corporate credit, demand is falling for cash-like short-term bond ETFs. For example, more than $860 million flowed out of the iShares 0-3 Month Treasury Bond ETF (SGOV) in the past week, after $6.6 billion flowed into the fund last year.


Finsum:With yields on high-yield bonds near a ten-year high, it’s difficult for investors to resist junk bond ETFs, even with warnings piling up.

High Yield Bond ETFs have seen a resurgence in inflows over the past few months. Between September 9th to December 9th, $5.4 billion in capital moved into 53 high-yield bond funds that are part of ETF Central’s high-yield bond category. This includes inflows of $2.7 billion over the past month. The uptick in inflows suggests that investors are more willing to take on risk now. High-yield bond ETFs may have higher rates and return potential, but also come with greater default risk. The jump in flows can be attributed to lower-than-expected inflation data, which could lead investors to believe that the Fed might slow down its tightening cycle. For instance, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in November on a seasonally adjusted basis, after increasing 0.4 percent in October. In addition, many investors have been sitting on the sidelines due to the uncertainty in the market and waiting for the time to deploy cash into riskier investments such as high-yield bond ETFs. Plus, the spreads in high-yield bonds have been widening this year, which indicates lower prices and selling pressure on the category. With spreads still fairly wide, there is potential for more upside in high-yield bonds.


Finsum:High-yield bond ETFs are seeing a jump in flows on account of lower-than-expected inflation data, cash on the sidelines being put to use, and fairly wide spreads in high-yield bonds.

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