Mass Exodus of Bond Investors

Easy come, easy go … at least when it comes to fund flows! Bond investors who were so enamored with fixed-income ETFs over the past several months fled like mad in October. According to the Wall Street Journal, BlackRock’s iShares iBoxx High Yield Corporate Bond ETF (HYG) suffered $998 million in outflows last Thursday. That was the biggest one-day exodus of cash ever.

For all of last week, they also yanked $1.7 billion from the iShares ETF that invests in higher-grade corporate bonds. That was the biggest outflow since the ETF hit the market way back in 2002. 

The problem is that many investors weren’t buying these ETFs because they believed there was a real, tangible improvement in corporate credit quality. They were buying ETFs that own corporate bonds because central banks like the ECB announced plans to buy corporate bonds. Now, it looks like the U.S. Fed could start raising rates soon … and central banks in Japan and Europe may start pulling back from their bubble-inflating ways. That means the virtuous cycle could turn into a vicious one. And that underscores the danger inherent in all these market-manipulating, asset buying programs.