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Dec 21, 2018

Investors unload the biggest junk-bond ETFs as market nosedives

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A painful year for junk-bond ETFs just got worse.

Investors have pulled US$2.6 billion from U.S.-listed exchange-traded funds tracking the high-yield market in December, bringing the total for 2018 to US$9.6 billion and putting it on track for the first year of outflows ever. At least one trader sold nearly 4 million shares worth around US$322 million of the iShares iBoxx High Yield Corporate Bond ETF, ticker HYG, on Thursday, while the SPDR Bloomberg Barclays High Yield Bond ETF, or JNK, had two block trades totaling around US$617 million. Each fund shed about 8 per cent of its assets.

A record 68.8 million shares of HYG worth US$5.5 billion traded Thursday, more than six times the average daily turnover for the past five years. About 42 per cent of its assets changed hands, the most ever. And investors moved 48.6 million shares of JNK worth US$1.6 billion, more than quadruple the average daily turnover for the past five years.

It’s the latest sign that investor fears about trade disputes, rising interest rates and a possible shutdown of the U.S. government are spreading beyond imploding stocks to other risky corners of the financial markets. The Bloomberg Barclays US Corporate High Yield Index has declined more than 4.5 per cent in the fourth quarter, on pace for its worst quarter since 2015.

“Outflows in HYG and JNK have been building for months,” said Christian Fromhertz, chief executive officer of Tribeca Trade Group. “Yesterday’s volume felt like a capitulation.”

The U.S. junk bond index spread flared to 508 basis points Thursday after equity and oil markets tanked, marking the biggest increase since 2011.