Thursday, 6 June 2013

Credit - High Yield ETF - The Fast and The Furious

"Abused patience turns to fury." - Thomas Fuller 

Watching with interest the latest sell-off in the ETF High Yield credit space with our good cross asset friend, we thought we could only come up with this cheeky title given the ETF HYG, which we have been monitoring, notably because of its correlation with the S&P 500, saw some significant outflows yesterday, with 305 millions USD outflows, representing 2% of AUM - chart source Bloomberg:

As our good friend commented, outflows on the US High Yield market have been accelerating this week, particularly on the two most active and liquid ETFs, namely HYG and JNK who lost around 10% of AUM (assets under management) in two weeks (out of 30 billion USD of total AUM). The acceleration of this movement has highlighted the growing decorrelation as displayed above between US High Yield and the S&P 500 which so far has held its ground relatively well.

As reported by Bloomberg by Lisa Abramowicz, losses on junk-bond ETFs have been outpacing the broader High Yield market:
"Losses on junk-bond exchange-traded funds are outpacing the broader U.S. speculative-grade market by the most in three years, signaling a deepening slump for debt that traded at record-high prices less than a month ago.
BlackRock Inc.’s $14.5 billion iShares iBoxx High Yield Corporate Bond ETF, the biggest of its kind, plunged 2.6 percent in May, 2.1 percentage points more than the decline in the Bank of America Merrill Lynch U.S. High Yield Index. Investors redeemed 3.3 million shares, or about $305 million, from the fund June 4, its biggest one-day outflow on record.
After reaping returns of 127 percent since 2008, junk-bond buyers are demonstrating concern that rising interest rates will erode future gains as Federal Reserve policy makers consider a pullback from stimulus measures that fueled demand for the debt and pushed yields below 6 percent for the first time on record. While ETFs hold less than $40 billion of the $1.15 trillion U.S. high-yield bond market, they act as a quicker gauge of market sentiment because their shares trade more frequently than most corporate bonds." - source Bloomberg.

If you do not believe in the "tapering QE" scenario, which led to a recent surge in US yields on government bonds and this recent sell-off on credit, then the relative value of High Yield, is starting to be compelling again (6.50% in YTM - yield to maturity versus S&P 500). 

So, we think you should pay attention to the movement in High Yield particularly because of the thin liquidity in credit and if the "crowded" long exposure to High Yield is followed by a panic reaction in the market.

You can as well play this move via options following the compression in the 3 months volatility spread between High Yield and S&P 500 (chart 3 - with volatility on listed ETF HYG, similar trend if you look at the volatility on the CDS index CDX HY on the OTC market):

Chart 1 - ETF HYG versus S&P 500 over one year and a half - source Bloomberg:

Chart 2 - CDX HY versus S&P 500 over the same period - source Bloomberg:

Chart 3 - Bloomberg chart displaying 3 months volatility between the S&P 500 versus ETF HYG (High Yield):

"Fury itself supplies arms." - Virgil

Stay tuned!

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