Bill Gross is right: bond ETF activity has been frenzied in the grip of Wall Street turmoil.
The violent selloff in the Treasury market has sent shockwaves through fixed-income funds across the spectrum, spurring a gush of trading in the largest exchange-traded funds, an exodus of cash from high-yield trades and fresh mania across the options market. The iShares iBoxx High Yield Corporate Bond ETF (HYG) alone saw $10 billion of shares change hands Wednesday, the most since its inception 16 years ago.
Gross, co-founder and former chief investment officer at Pacific Investment Management Co. highlighted the recent spikes in volumes in fixed-income ETFs, noting that investors who are “spooked” by recent losses have joined a crowd of bond bears. All that has the potential to exacerbate negative market sentiment.
On the flipside, inflows into some of the world’s largest bond ETFs have also held up amid the losses, suggesting a cohort of money managers may be fighting the hawkish Federal Reserve or are simply seeking to scoop up the highest yields on offer in decades.
Here are some of the notable moves seen in the bond market, as viewed through the lens of ETFs:
Long-Bond Losses
The largest long-dated bond ETF is in the midst of its biggest price drop on record, though flows into the fund haven’t ceased amid the drubbing. The $38 billion iShares 20+ Year Treasury Bond ETF (ticker TLT) has lost 50% from its 2020 all-time high and has slipped more than 3% so far this week, according to data compiled by Bloomberg. But investors have continued to plow money toward it, with the fund seeing $17 billion come in so far this year, putting it on pace for a record annual haul.
TLT is poised for its sixth straight week of losses, shedding 10% over that stretch amid fears the Federal Reserve will keep interest rates higher for longer.
You “have something like TLT, which is hoovering in assets,” Lara Crigger, editor-in-chief at VettaFi, said in an interview. “Investors are trying to set themselves up for whenever rates do start to change and the environment starts to change. They want to have that barbelled approach so they’ll stay really, really short, but then they’ll also go to the very long end.”
Billions Leave Junk-Bond Funds
Investors are rushing out of high-yield ETFs at the fastest clip in months. The iShares iBoxx High Yield Corporate Bond ETF (HYG) earlier this week suffered its biggest daily outflow since July as traders pulled a net $1 billion out of the fund. Meantime, short-interest in the ETF has climbed to its highest level since May, according to data from IHS Markit Ltd.
Traders also pulled roughly $126 million from the the iShares Broad USD High Yield Corporate Bond ETF (USHY) this week, the biggest outflow since August.
“The main message is that investors got a bit more worried about the outlook for economic fundamentals and risk assets amid this move in long-end yields. HY spreads had been trading in a tight range for a few months and were relatively tight considering where we started the year,” said Winnie Cisar, global head of strategy at CreditSights Inc.
Volume Spikes
Amid the turmoil in the bond market, large bond ETFs have also seen spikes in volumes. That includes TLT, which on Tuesday saw its biggest surge in volume since the height of the pandemic. The iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) also saw surges.
“There is no consensus view right now, put it that way,” said Chris Gaffney, president of world markets at EverBank. “You see some people taking the stance that the Fed’s done, they’re not going to raise rates anymore, we’re going to stay here, and others say that they’re going to continue to raise rates — so on either side at the margins, you see lots of that. When you don’t have a consensus, when everybody is not on the same side of the boat, you’re going to get more volatility and more activity, certainly.”
When Could It End?
Amid a brutal week of selling for bond ETFs, the silver lining is that the selling may be getting exhausted. Gross branded the market “a little oversold” even as he didn’t rule out the possibility that 10-year Treasury yields could top 5%.
Open interest for bullish call contracts has soared to an all-time high for TLT, which suggests traders may see an end to the market rout that has led to TLT’s longest streak of weekly losses since 2022.
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