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High-Yield Bond ETF Outflows Spike To Record

Tyler Durden's picture




 

We have been monitoring the shifts in the high-yield bond market for a few weeks, noting that bond ETF and credit derivative markets are showing some serious (divergent from stocks) signs of risk-off. Whether this was driven by call-constraints limiting upside potential, a fundamental realization of a shifting macro background, or ad hoc idiosyncratic risk elevation due to releveragings and potential public-to-private transactions is unclear. What is clear is that this week saw the largest HY ETF outflow on record. Furthermore, HYG's shares outstanding have plunged over 11% in the last 90 days as ETF units are for the first time destroyed QoQ not created. The rotation appears to be up-in-quality and up-in-capital structure as loan funds saw inflows - but with stocks and credit linked inexorably via the balance sheet, the divergence cannot last forever (and never has). Until very recently this has not spilled over into the cash bond market, but the last few days have seen selling pressure picking up into this illiquid market.

 

US HY ETF outflows hit a record this week...

 

While risk-aversion is clearly high in credit, the repression of underlying rates has forced HY bond prices well above Par in many cases... leaving them largely call-constrained (or upside limited)

The risk-off flows from HY bonds appears to be an up-in-quality trend (IG inflows remain robust) but even more an up-in-capital-structure trade (another sign of concerned risk aversion) as US Loan funds see inflows surge...

 

HYG - the HY Bond ETF - saw shares outstanding destroyed at a record pace in the last 90 days - the first time ever a 90-day period has seen unit destruction not creation...

 

But until recently, the ETF unit destruction had not impacted the actual physical cash bond market - but as is clear now (the blue line) - selling is picking up.

 

The HY bond market is illiquid; it is not like a stock market. When sellers appear, prices can gap quickly and given the size and velocity of outflows, it is no wonder that high yield bond managers appear willing to pay up for protection of their overall books (as HY CDX spreads push notably wider than their fair-value).

The disconnect is extremely clear (between stocks and HY credit) but what is less obvious is the lower pane where we see the virtuous ETF premium to NAV switch to a discount - putting pressure on the underlying bonds...

 

The hope, of course, being that the macro protection will enable then to ride this short-term storm without being forced to sell... Let's hope that is the case, or first mover advantage is very much the order of the day for the over-stuffed world of HY fund managers.

In recent years, equity valuations have correlated extremely highly with low-rated credit - something has to give.

Source: BofAML and Bloomberg

 

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Fri, 02/08/2013 - 14:07 | 3226439 oleander garch
oleander garch's picture

These markets you speak of what: would it be possible - theoretically - for them to exist in our space-time continuum?

Fri, 02/08/2013 - 14:33 | 3226506 knukles
knukles's picture

No.
They exist only in an alternate reality known by Knukles as the Milikeniverse, which is closely related to the Higgs boson, Planck's constant, the square root if Pi and Schrodinger's missing cat.
But nevertheless, whilst viewing such from afar... Long Afar form another Imaginary Galaxy Far Far Afar known as Stocklandiaopedia, similar to pedophilia but dealing exclusively with widows and orphans, never forget that some Fair Maidens like Mandy Bigtits and their Dashing Heroes claim that stocks are a good leading indicator of somethingorother that matters not anymore for the metrics have no reality, alternate or not...

But Interest Rates and Credit are the Best Leading Indicators of All

But then again, our erstwhile equity breatheren have no fucking clue as to what reality is or is not in anycase.  Never have, never will.
Hey fellas.... just remember your favorite saying "Even a broken watch is right twice a day"... Ya'll been broke for a bazillion years... no, don't look at the client contributions and withdrawls.  You;ll drink too much again.

"Hooray for Mandy Bigtits." says Rachel!

 

Fri, 02/08/2013 - 14:42 | 3226533 SamAdams
SamAdams's picture

Risk is a great investment right up until it is not...  Overbought market still pinging off the charts.  Big boys getting out, euro-smell drifting this way.  I think I am cashing out my longs today, tyvm....  And may Feinstein sleep with the gay fishes...

Fri, 02/08/2013 - 14:50 | 3226562 Lost Wages
Lost Wages's picture

Today I began getting rid of stocks. Starting a "great rotation" into cash for a few months. 

Fri, 02/08/2013 - 14:08 | 3226443 Caracalla
Caracalla's picture

According to CNBC, this is part of the "Great Rotation" that will send stocks to the moon...

Fri, 02/08/2013 - 14:32 | 3226507 vote_libertaria...
vote_libertarian_party's picture

Yes, because that is the normal chain of events.

 

An economy that is highly leveraged...as interest rates go higher it is gooder for that economy???

 

uhhh...ok

Fri, 02/08/2013 - 14:18 | 3226467 larz
larz's picture

row tay shun - what happens to stocks when the rates spike? i am so confused did the jeenyusses on CNBC cover that? I demand to know the net position of obama and congress

Fri, 02/08/2013 - 14:20 | 3226478 youngman
youngman's picture

money in...money out....I don´t see money leaving bonds...money is going into funds.....stocks up....where is it all coming from????

Fri, 02/08/2013 - 14:45 | 3226537 slightlyskeptical
slightlyskeptical's picture

It's coming from Our Buddy Ben. Those selling him crap MBS are now loaded up with big cash. What else do you expect them to do with it, but roll it over into the next bubble? Not sure how Ben will save them this time. Maybe just buy the entire stock market? Might as well since goverment and capital have become one and the same.

Fri, 02/08/2013 - 15:46 | 3226780 The Econ Ideal
The Econ Ideal's picture

HYBs are still significantly overbought. Those buying here will not be compensated for the risks going forward. Need a credit/interest rate market correction. 

Fri, 02/08/2013 - 18:22 | 3227381 chistletoe
chistletoe's picture

there's limited places for money to go now.

 

acapulco gold is a lt cheaper than it used to be.

there's only so much silver and gold to go around.

if you hold cash, you'

re gonna be accused of money laundering.

real estate?  stop laughing.

so,that pretty much only leaves stocks ....

Sat, 02/09/2013 - 03:27 | 3228309 Lord Of Finance
Lord Of Finance's picture

Near record high stock prices. Near record high bond prices. Near record high precious metal prices??????????

 

   I made my final escape from this madness in September. Bond market carnage is in progress. The money is going into stocks, for now. We are in the early stages now. The biggest crash in history is coming, but many more games will be played.

 

   Sit tight. The end is in sight. 

 

   I have done everything I could with what I have. Of course I am not completely satisfied. I wish I could afford to actually buy the(a) farm.

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