Investors are sinking cash back into the largest junk-bond exchange-traded fund signalling that the rout in the market for risky corporate debt may be overdone.
BlackRock’s iShares iBoxx High Yield Corporate Bond exchange-traded fund absorbed a record $1.5-billion (U.S.) over the past six days, according to data compiled by Bloomberg, a sign that sentiment among credit investors is improving as crude rebounds from a 12-year low. The flows mark a reversal from the start of the year, when a similar amount was pulled from the ETF as the Standard & Poor’s 500 index plunged more than 10 per cent.
“A few weeks ago, some people were scared that we were headed back in 2008 – perception of fundamentals was pretty bad,” said John Manley, who helps oversee about $233-billion as chief equity strategist for Wells Fargo Funds Management in New York. “We were way ahead of ourselves. We’re back looking at things in a more sensible way.”
Investors are taking note, as shares of companies with weak balance sheets, hit hardest during the worst-ever start to a year for U.S. stocks, have started to reprise their role as outperformers amid the latest rally. The companies stand poised to benefit from drops in the premium on high-yield debt and lower borrowing costs for junk issuers.
“Both ETF and open-end high-yield mutual funds had pretty bad outflows,” said Dan Fuss, vice-chairman of Boston-based Loomis Sayles & Co. “That seems, for the moment, to have ended. It could be at the moment or that moment could be very long.”
Investors are piling into bets on equities that track high-yield bonds, with BlackRock’s ETF absorbing $1.2-billion last week, the most since inception in April, 2007. The total included a single-day record of $481 million on Feb. 16.
The Merrill Lynch U.S. High Yield Index lost 11 per cent over 12 months ended Feb. 11. It has since added 4.2 per cent as sentiment improves. The average yield on the debt this fell Monday to 9.3 per cent from 2016 high of 10.2 per cent.
Improving tone in the junk debt market is benefiting some issuers. Hospital operator HCA Holdings Inc. Tuesday shifted the mix of a financing by boosting the bond part of the deal to $1.5-billion from $1-billion and reduced loans it was was seeking by the same amount to $1.5-billion, according to a person with knowledge of the deal, who asked not to be identified because the information hasn’t been made public.
There were few things investors could do better with their money in the past three years than put it in stocks backed by the weakest balance sheets. That trade reversed to start 2016 as crude sank and global equities plunged into a bear market amid persistent concern that China’s slowing growth will spread. As those forces have eased in the past two weeks, stocks have rallied and junk-rated shares have drawn investor attention.
Junk stocks in the S&P 500 equity benchmark, of which 14 per cent are energy companies, have benefited from a rebound in crude. The price of oil has increased in six of the past seven days, and is up 31 per cent to $34.40 a barrel.
“Oil has been the culprit for high-yield, and it’s just a question of how they work through it,” Mr. Manley said. “Every dollar above $30 that it goes up is crucial. In a year, things will be better – it’s just a question of getting from here to there.”Report Typo/Error