Strong Flows in Bond ETFs After Fed Interest -- Journal Report

Exchange-traded funds focused on non-investment-grade bonds rallied in April after the Federal Reserve signaled interest in buying ETFs exposed to the sector to support the markets. Investment-grade bond funds benefited, too.

Buying junk-bond ETFs "is an unprecedented move for the Fed," says Pat Keon, senior research analyst at Refinitiv Lipper. In response to the announcement, SPDR Bloomberg Barclays High Yield Bond ETF (JNK) and iShares iBoxx $ High Yield Corporate Bond (HYG) took in $1.40 billion and $1.38 billion respectively, for the fund-flows week ended April 15.

It was the second-highest weekly net inflow ever for JNK and fourth-highest for HYG, says Mr. Keon. Both ETFs launched in 2007. "The high-yield bond ETF universe also gained some support at the end of March when the $2.2 trillion stimulus billed was passed," says Mr. Keon.

He says there was speculation that the bill would create stability and a bottom for the markets; junk bonds correlate more with stocks than investment-grade corporate or government debt because of the risk involved.

Buying on the dip

"At that point, high-yield corporate-debt funds were down over 14% for the year to date, so it's possible investors were buying on the dip before a potential rebound started in earnest. JNK took in $1.529 billion in net new money that week, its best ever, while HYG had net inflows of $777 million," says Mr. Keon.

BlackRock's iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) , along with HYG and JNK, are the top-rated ETFs, says Todd Rosenbluth, senior director of ETF and mutual-fund research at CFRA. "Earlier in April, liquidity was drying up for the corporate bonds inside these popular ETFs, causing them to trade at discounts to net asset value due to stale valuations," says Mr. Rosenbluth.

The Fed announcing it is going to buy corporate bonds and use some money to buy a small percentage of corporate- bond ETFs has provided a much-needed boost. "Initially these ETFs traded at premiums to NAV before returning to near equilibrium as they were pre-Covid-19," says Mr. Rosenbluth.

Mr. Rosenbluth adds that while the Fed isn't likely to purchasing large stakes in corporate-bond ETFs, the news they are able to do so solved the overall liquidity problem.

What will the Fed buy?

While the Fed has indicated that it may at some point make purchases of certain investment-grade corporate or junk- bond ETFs as part of its program to backstop the corporate-debt market, it has yet to spend a dollar against that particular program, say Ben Johnson, director of global ETF research at fund-trackers Morningstar.

"We've seen massive inflows into the broad-based investment-grade corporate-bond ETFs, most notably LQD, which in a matter of weeks saw 25% organic growth -- driven by billions of dollars of net new inflows," says Mr. Johnson.

The Fed, adds Mr. Johnson, "said that it would invest in a fashion that would allocate among the different ETFs on a pro rata basis, based on their current market shares. So if you look across the ETFs that would be targets for purchase by the Fed, most of the money would go to LQD and HYG."

CFRA says another beneficiary of the Fed buying high-yield bonds would be VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) , which owns bonds that were previously rated low-investment-grade but were downgraded to BB.

Ms. Akhtar is a writer in London. She can be reached at

  (END) Dow Jones Newswires
  05-03-20 2229ET
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