An ETF to capitalize on the pain of junk bonds

FFixed income traders are increasingly bearish in the speculative high yield debt market. Investors in ETFs can also hedge against further weakness in the junk bond segment with an alternative strategy.

Investors withdrew more than $3 billion of the $14 billion iShares iBoxx $ High Yield Corp Bond ETF (NYSEArca: HYG) for 7 straight days, the longest release streak since September 2020, reports Bloomberg. Nearly $6.6 billion has been repaid by HYG so far in 2022, putting the ETF on pace with its worst year of outflows.

The sudden exodus comes as investors have shunned fixed-income assets, especially high-risk categories like high-yield debt, as the Federal Reserve begins multiple interest rate hikes to combat pressures inflationary.

Looking ahead, the pain could continue as around 70% of junk bond investors expect a higher risk premium for the asset class over the next three months, the highest since the global financial crisis, according to the Bank of America Corp.

Many high yield managers pointed to the growing risks associated with rising interest rates, soaring levels of inflation and heightened concerns about the global economic outlook.

“It’s a double whammy – rates repricing up, stocks likely to reprice down, meaning high yield companies mechanically have higher leverage and a more expensive rollover rate” , Peter Chatwell, head of multi-asset strategy at Mizuho International Plc, told Bloomberg. “That’s not to mention the general weakness in earnings that seems likely due to stagflation.”

“We also probably need to see higher default rates come true, so some bottom fishing can take place with conviction,” Chatwell added.

Alternatively, investors can also consider inverse or short bond ETFs to further protect against a decline in speculative-grade debt markets. the ProShares Short High Yield (NYSEArca: SJB) takes the inverse -1x or -100% of the daily performance of the Markit iBoxx $ Liquid High Yield Index, which acts as the underlying index for HYG.

For more news, insights and strategy, visit the Fixed Income Channel.

Learn more at

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


Not all news on the site expresses the point of view of the site, but we transmit this news automatically and translate it through programmatic technology on the site and not from a human editor.
Back to top button