Sell-Off in the Corporate Debt Market

Accelerating Corporate Debt Sell-Off Partially Offset by Government Debt Inflows

The Federal Reserve raised the benchmark interest rate by half a percentage point in May in an effort to curb inflation. This hike was followed by another three-quarter of a percentage point interest rate increase announced on Wednesday, June 15th when the Fed concluded its two-day policy meeting. This is the largest rate hike that the Fed has approved in a 28-year time span. The all-out war against inflation means one thing, households and businesses will see their borrowing costs shoot higher. When the markets were in a low-interest-rate environment, government bond rates were depressed forcing investors to bet on riskier assets, mainly stocks. Now, with the Fed, and other Central Banks globally embarking on a succession of rate hikes, investors are expressing concerns that the economy might be thrown into a recession making government bonds look increasingly attractive as a safe alternative to equities should the worst happen.  

Fixed income ETFs domiciled in Europe recorded USD$1.02 billion[i] in net outflows for the week between June 13th and June 17th. Corporate bond ETFs were riding a wave of sell-offs with USD1.1 billion in outflows. Similarly, High yield bond ETFs shed USD$511 million of assets. This sell-off in ETFs investing in corporate and high-yield bonds was partially offset by positive inflows of USD$333 million into Government bond ETFs. Investors ditched riskier segments of the fixed income market and migrated to higher-quality havens. Investment grade bond ETFs registered USD$15 million of investor money over the week.  

Top 5 Flow Receivers Last Week:

• iShares $ Treasury Bond 7-10yr UCITS ETF USD (Acc) (CSBGU0): USD$357 million
• iShares $ Corp Bond UCITS ETF (LQDE): USD$346 million
• Invesco US Treasury Bond 7-10 Year UCITS ETF (TREX): USD$274 million
• Invesco US Treasury Bond 7-10 Year UCITS ETF (TRDE): USD$192 million
• Fidelity Sustainable Global Corporate Bond Multifactor UCITS ETF (FSMP): USD$137 million

[i] Fund flow Data as of June 17th.