My inbox just recieved the below communiqué from BlackRock regarding its iShares iBoxx $ High Yield Corporate Bond ETF, HYG.
HYG has become a shorthand of sorts for the vicissitudes of the high yield (or junk) bond market. It’s highly liquid and widely traded, serving as a de facto index barometer for the space. Unlike an actual index, retail investors and the Twitter commentariat can readily pull up a quote on it at any given moment and use that to describe what’s happening in the junk market. This happens with EEM for emerging market stocks, TLT for long Treasury bonds, etc. HYG and its counterpart JNK, for better or worse, have become the visual representation for this asset class among traders, advisors, reporters and other interested parties.
BlackRock is smart for having put this out ahead of tomorrow’s hysterical headlines…
BlackRock statement on iShares HYG
“Trading in iShares HYG surged last week as investors were able to transact directly with one another at known, transparent prices and with ample liquidity.
HYG delivered $4.3 billion in secondary volume Friday, and $9.8 billion over the course of last week. The vast majority of this trading took place directly between buyers and sellers on exchange, without the underlying bonds needing to change hands.
HYG performed as clients have come to expect, as an efficient tool for trading, investing, and price discovery.
By enabling clients to meet directly in public markets, HYG served as a positive force for financial stability.
HYG’s high performance last week builds on prior examples of investors’ turning to bond ETFs under market stress – during the 2013 taper tantrum, the 2011 U.S. Treasury downgrade, the 2010 European sovereign crisis, and the 2008 financial crisis after the fall of Lehman Brothers.”
Additional data regarding HYG:
From December 7 – 11, 2015, HYG traded at a record volume of $9.8bn, with $4.3bn traded on Friday, December 11 alone.
Even with record volumes of $9.8bn, there was only $560mm of redemptions in HYG — a ratio of 17:1 — for the entire week. This means for every $17 of HYG that traded on exchange, only $1 of high yield bonds was traded to support it.
Outflows of this size are not unusual. In fact, HYG saw outflows of similar size three other times this year (May 5, May 6 and June 8). We saw $630mm of outflows on February 3, 2014.
Josh here – If the credit cycle is truly turning down and defaults are on the verge of picking up, there is no doubt that this fund will become a lightning rod of sorts and possibly a media piñata. And if mass withdrawals hit the market, HYG will have its share, and will also be pointed at as a culprit for “increased volatility.” Because before junk bond ETFs, there was never any volatility 😉
While we may be early in the game, so far the fund is doing what its prospectus says it is meant to do – closely track the high-yield bond market while providing liquidity to those who wish to add or hedge exposure.