Junk Bond ETFs take a hit


Investment-grade debt and exchange-traded funds tied to junk bonds have stumbled since mid-August as renewed fears over the Federal Reserve’s interest rate outlook weighed on the recent uptick in risk.

Over the past week, the iShares iBoxx $ High Yield Corp Bond ETF (HYG) decreased by 2.8% and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) down 2.9%.

Meanwhile, the two junk bond strategies were also among the most hated ETFs over the past week, with HYG suffering just over $1.7 billion in net outflows and JNK suffering almost 1. $3 billion in buybacks, according to VettaFi data.

The sudden reversal can be attributed to the more widespread shift away from risky assets as market watchers remain focused on the Federal Reserve’s hawkish monetary policy outlook. Fed officials remained firm on their aggressive outlook for interest rate hikes to tame elevated inflationary pressures.

“Over the past week or so, there seem to be challenges to the larger narrative that the Fed may be on pause in 2023,” Chris Lee, bond portfolio manager at Allspring Global Investments, told Wall Street. Log.

Many fear the Fed will continue its path of raising interest rates at its next policy decision meeting on Sept. 21, with further hints from officials at their annual conference in Jackson Hole, Wyoming on Friday.

Fixed income investors held back as the Fed’s tight monetary policy hovered over their heads. As a result, many returned to the markets as optimism rebounded from July lows, Jeffrey Stroll, chief investment officer at Post Advisory Group, told the WSJ.

“We heard anecdotally that investors were sitting at 4% to 5% cash,” Stroll said. “The average level, when we ask this question, is more like 1% to 2%.”

Looking ahead, Stroll warned that fixed income markets could experience greater volatility ahead of the Fed’s meeting in late September.

“There’s just a lot of uncertainty and lack of conviction about where the market is going,” Stroll added.

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