Amid Increased Activity, Big Junk Bond ETF Holds Its Ground

With the odds of the Federal Reserve boosting interest rates rising and defaults by energy sector issuers of junk-rated corporate debt, these are trying times for high-yield corporate bond exchange traded funds, including the iShares iBoxx $ High Yield Corporate Bond ETF HYG.

Still, HYG and the SPDR Barclays High Yield Bond ETF JNK, the two largest junk bond ETFs by assets, have managed to tack on a combined $4.6 billion in new assets since the start of the fourth quarter. However, rising volume in the ETFs could be a sign of investor skittishness and a harbinger of volatility to come.

HYG's volume surged to a record Tuesday. Actually it was “more than double the heaviest single trading day during the 'taper tantrum' of 2013, when hints that the Fed might end its quantitative easing program sent bonds plunging. In dollar terms, some $2.1 billion traded in HYG on Tuesday, according to BlackRock, also a record. Heavy volume came as the junk-bond ETF’s price closed at its lowest level since October 2011,” reports Barron's. 

Despite all the oft-cited concerns about the liquidity of high-yield bond ETFs during times of elevated market stress, HYG continues to deal with such scenarios with aplomb. According to BlackRock, HYG traded a record $2 billion in the secondary market Wednesday following a day of elevated volume in traditional trading.

The secondary market for junk bonds and ETFs like HYG is vital because during times of heightened market stress, over-the-counter high-yield bond market liquidity can and does evaporate, forcing the bulk of trading into the largest, most liquid issues.

As was seen during the taper tantrum of 2013, the secondary market for ETFs bolsters available fixed income market liquidity and can act as an efficient price discovery mechanism for the issues held by a fund such as HYG.

“In the bilateral, over-the-counter (OTC) bond market, it is difficult to determine fair market value or current market clearing prices for bonds, which can make it difficult to source liquidity and determine current market clearing prices. By contrast, fixed income ETFs hold bonds as their underlying securities but the vast majority of trading in ETF shares, including almost all trading by retail investors, occurs on an exchange in a visible, two-way market, as with listed equity securities. Because of this secondary market for ETFs, risk may still be transferred through purchases and sales of ETF shares even if the OTC market for the underlying bonds is challenge,” according to a BlackRock study conducted in 2013.