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Market Extra: Corporate debt ETFs plunge, head for worst day since March 2020, as inflation shows no sign of a peak


Funds designed to give investors an easy way to trade in and out of U.S. corporate debt plunged on Monday, as inflation fears gripped financial markets.

The biggest exchange-traded funds for U.S. corporate debt were on pace for their worst daily skid since the spring of 2020, when coronavirus fears were battering financial markets, according to Dow Jones Market Data.

Selling initially took hold Friday, after the May consumer-price index showed little hope of high U.S. costs of living easing. Rents, gas and food prices all pushed higher, dashing hopes by many investors, households and even the White House that efforts to cool inflation from a 40-year high already might be helping.

Shares of riskier high-yield, or “junk,” bond ETFs were down the most on Monday. Here’s the latest:

The $12.5 billion iShares iBoxx $ High Yield Corporate Bond ETF

fell 3.2%.

The $8.1 billion SPDR Bloomberg High Yield Bond ETF

traded 3.4% lower.

For investment-grade debt, the $32.8 billion iShares iBoxx $ Investment Grade Corporate Bond ETFLQD was off 2.2%.

JNK and LQD were on pace for their worst daily percentage declines since March 18, 2020, or two days before swaths of the U.S. imposed COVID-19 lockdowns, according to Dow Jones Market Data.

HYG was on pace for its worst daily drop since April 1, 2020.

On Friday, all three ETFs booked their worst daily percentage decline since May 5, according to Dow Jones Market Data.

ETFs often are the first thing investors sell for liquidity when markets get choppy, since their shares trade in a flash, like stocks, even though underlying bonds held by ETFs can take hours, days to longer trade.

Major U.S. stocks indexes also tumbled Monday, with the S&P 500 index

testing bear-market territory, the Dow Jones Industrial Average

off more than 600 points and the Nasdaq Composite Index

down 3.6%.

Read: Stock plunge puts S&P 500 on track to enter a bear market: What investors need to know

Talk of layoffs

“Last year, companies had tremendous pricing power,” said Ellen Gaske, lead economist at PGIM Fixed Income, by phone, noting the glut of household savings that helped corporations pass on higher costs to consumers, who often were competing for fewer goods due to supply-chain disruptions.

But in the past few months, “you can see cracks appearing,” Gaske said, including as business profits adjust to workers with paychecks stretched from higher costs for gas, groceries and more.

U.S. companies, like many households, emerged from pandemic lockdowns in robust financial shape, with heaps of spare cash lying around, given ultralow interest rates and the huge amount of aid from Washington and the Federal Reserve.

That’s now being reversed as household stimulus checks vanish and prices for nearly everything soar, which has started to pressure quarterly corporate earnings.

Related: Junk bonds are showing signs of liquidity strains as the S&P 500 narrowly avoids bear market territory

“For now, inflation is the ‘singular mandate” of the Fed, and the ECB, but over the next few months we would anticipate that the employment side of the Fed’s mandate will re-enter the consideration-function as companies are increasingly freezing hiring, with a number of them executing layoffs,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income, on Friday in emailed comments, after the inflation report.

Gaske at PGIM Fixed Income, however, said emerging cracks in corporate credit likely will be offset by the overall strength of U.S. households.

“There’s room for those cracks to appear and not to derail the economy,” she said.

U.S. stocks also booked sharp declines Friday, with the S&P 500 index

off 2.9%, the Dow Jones Industrial Average

down 2.7% and the Nasdaq Composite Index

off 3.5%, according to FactSet.

See: Why Ray Dalio’s Bridgewater started betting against U.S. and European corporate bonds

Also read: These 19 big tech stocks have now dropped at least 60% from their 52-week highs

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