The ever-so-popular high-yield bond ETF, HYG, is suffering its biggest 3-day drop since Thanksgiving as higher beta assets are underperforming and the up-in-quality and up-in-capital-structure trade gathers pace post LTRO 2. Even with last week's ex-divi date, we note that this loss of the last 2-3 days wipes out the yield that was 'reached for' of the last 2-3 months. It seems all too easy to buy high-yield bonds when they are on the rise but underlying that ETF is a portfolio of 'junk' assets - some better and some worse obviously - that are increasingly being driven top-down by the fast-money action in this newfound ETF's liquidity (as dealer inventories dwindle). This leaves them prone to just-as-fast exits as the secondary high yield bond market remains 'illiquid' away from benchmark size and ETF-bound assets providing little underlying 'pricing' evidence of market value. This is the largest underperformance of the high-yield market relative to the equity market since the recent rally began.
The upper pane is HYG's price action and the lower pane shows the percentage change over the last 3 days is the largest since the main rally began on Thanksgiving.
Even adjusted for the dividend drop, the underperformance of HYG and HY (the credit derivative index that tracks high yield bonds) is clear post LTRO2. Investment grade is outperforming as up-in-quality risk aversion starts to creep into asset allocation.