After a blowout 2020 for corporate debt, exchange-traded fund investors are quickly souring on those bonds.
The world’s largest credit ETF notched its worst month of outflows since it began trading about two decades ago. Traders pulled roughly $3.6 billion from the iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) in March, according to data compiled by Bloomberg. That exodus came as the $42 billion fund suffered its biggest quarterly rout in 12 years.
High-grade corporate bonds have come under pressure as the U.S. vaccine rollout picked up pace, brightening the economic outlook. Meanwhile, President Joe Biden’s stimulus measures have boosted expectations for inflation, fueling concern over the value of future fixed-income returns. That’s sparked a vicious selloff in longer-dated Treasuries and hammered funds such as LQD, which has a relatively high duration -- or sensitivity to interest-rate changes -- of 10 years.
“It’s probably part and parcel with Treasury rates moving higher,” said Sameer Samana, Wells Fargo Investment Institute’s senior global market strategist. “We still like credit due to the higher income, but a lot less than we did last year, when spreads were wider.”
The outflows are a stark reversal from 2020, when the Federal Reserve’s pledge to backstop credit markets at the height of the coronavirus turmoil fueled nearly insatiable demand. LQD -- one of the ETFs purchased by the Fed -- absorbed roughly $14.9 billion worth of inflows last year, only a fraction of which was from the central bank itself.
A year later, bearish wagers against the fund have ballooned. Short interest as a percentage of shares outstanding on LQD currently clocks in at about 14%, IHS Markit Ltd. data show. While that’s below the February peak of 19%, it’s well above the nearly 1% level of March 2020.
After this year’s rocky start, Peter Tchir of Academy Securities said the outlook for high-grade debt may improve. While 10-year government yields could hit 2% over the next month, that wouldn’t weigh as heavily on LQD as it did during the bond-market turmoil of the first quarter, according to him.
As that potential move in Treasuries would be much smaller than we experienced earlier this year,“I expect not to see outflows, and even to get some inflows,” said Tchir, the firm’s head of macro strategy. “The worst is behind us.”
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