In the year after the collapse of Lehman Brothers Holdings Inc. caused the biggest credit seizure since the Great Depression, investors demanded as much as 1.95 percentage points more to own harder-to-trade debt than more-frequently brokered notes, Barclays data show. That gap has shrunk to 0.31 percentage point, with the average yield on the older, smaller issuances falling to a record 5.56 percent on March 4, the data show.
Newer and easier-to-trade debt is yielding 5.25 percent, up from a record low 4.93 percent reached last May, according to the data. During that same period, the price of shares in BlackRock’s junk ETF have declined 2.25 percent to $94.12.
Tracking Flows
Buyers are looking for extra yield beyond the ETFs, which have seen trading volumes surge 800 percent since 2008, according to a Greenwich Associates study distributed on Feb. 27. In contrast, average daily volumes in the broader high-yield bond market have risen 69 percent, according to data from Bank of America Merrill Lynch indexes and Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Outstanding debt tracked by the speculative-grade index has grown 73 percent in the period to $1.26 trillion.
While trading in ETF shares doesn’t always result in sales or purchases in the underlying assets, investors increasingly track the flows when deciding when and what to buy.
“In terms of the ETFs, especially in the high-yield market, they’re a major cause of volatility,” said Thomas Chow, a Philadelphia-based money manager at Delaware Investments. “As the ETFs need to rebalance, there’ll certainly be a market reaction to those activities.”
More than half of U.S.-based investors surveyed by Greenwich Associates this year said they rely on fixed-income ETFs mostly because they provide easier, quicker access to relatively illiquid markets.
“Our bigger concern is what happens when expectations change,” said Mirko Mikelic, a senior money manager at ClearArc Capital Inc., who helps oversee $7 billion of assets. “When rates rise you’re going to see people exiting ETFs and you’re going to see the Street not trading as much. What happens when everyone tries to exit the theater at once?”