The bond market continues to get messy as investors panic over Greece and a pending interest rate increase from the U.S. Federal Reserve. Experts say the results of this panic could make the 2013 “taper tantrum” look like a mere blip—or nothing could happen at all. The world is clearly divided on what the fallout from all this risk and uncertainty could be—but no matter which camp you fall into, investors are taking action. And it’s all playing out in the bond market right now.
Last week for example, the Financial Times reported that investors have accelerated their withdrawal of money from exchange-traded funds (ETFs) tracking some of the riskier areas of the U.S. credit market as global bond yields continue to rise.
Two of the biggest high-yield bond ETFs have seen around US$2 billion in outflows—BlackRock’s HYG ETF had US$1.065 billion in withdrawals in the seven days up to June 9 while State Street’s JNK high-yield bond ETF saw US$746.5 million flow out this month.
Credit fears aren’t just limited to the junk market though—investors are also showing concerns over corporate bonds in general. BlackRock’s LQD ETF, which tracks investment grade corporate bonds, also saw outflows to the tune of US$546.4 million during the month.
As investors flee, though, it’s worth taking a closer look at who’s on the run, and who’s not.
The Financial Times, for example, notes that outflows in U.S. credit ETFs reflect a loss of appetite on the part of retail investors, who poured record amounts into the corporate bond universe after the financial crisis. Some worry retail investors could amplify the current bond sell-off—particularly JP Morgan, which warned of the retail investor effect in a recent research note.
As retail investors run, institutions are growing their appetite for fixed income ETFs across the board—and Sophie Baker at Pensions & Investments reports that as institutions rebalance their bond portfolios, they’re turning to ETFs for liquidity as markets become more and more uncertain.
As investors shuffle their positions in reaction to bond market uncertainty, one thing is clear—the potential liquidity mismatch in fixed income ETFs has investors spooked, particularly with some thinly traded bonds. Whether or not retail investors could tip the balance remains unclear at this point. But right now one thing is certain: liquidity provision is paramount for investors right now. They need to understand whether their ETFs are up to the job.