Fixed-income ETFs are warnings about what will come next, as cracks appear in the U.S. equity markets.
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A record $2.5 billion was poured into the iShares 20 Year Treasury Bond ETF ticker TLT in the week through Thursday, as investors sought refuge in government debt amid growing fears about the omicron variant. The bid for Treasuries came because of the sentiment on corporate debt sours: short interest on the $38 billion iShares iBoxx Investment Grade Corporate Bond ETF LQD is near an all-time high, while traders pulled money from the iShares iBoxx High Yield Corporate Bond ETF HYG for a third week.
It is a worrisome cross-asset signal of more turbulence ahead as equity markets quake due to coronavirus concerns and a surprisingly hawkish tilt from the Federal Reserve s Jerome Powell. The central bank chief has abandoned his signature transitory language about inflation and suggested that officials could speed up the pace of the tapering of the bond buying program. The prospect that the Fed may turn off the stimulus taps earlier than anticipated sent a shudder through technology and corporate credit, which have thrived in an era of ultra-low interest rates.
There is some caution on the part of investors towards credit, given the tight spreads, omicron concerns and the shift in the Fed's focus from the labor market to inflation, said Sameer Samana, Wells Fargo Investment Institute senior global market strategist. In the stock market, you should see defensives perk up -- it is no surprise that staples and utilities are outperforming. The fund jumped 1.2% on Friday as the equities slumped. TLT looked set for more inflows. The S&P 500 fell 0.8% Friday to close lower for a second straight week, dragged down by a selloff in tech. The ARK Innovation ETF and recently public companies were sunk as air escaped from the most speculative corners of the equity market.
A basket of non-profit tech firms is down 14% over the past five days, for the worst week since March 2020, as the Cboe Volatility Index climbed to the highest since January, as the Goldman Sachs Group Inc. basket of non-profit tech firms fell 14% over the past five days.
Bond fund flows reflect the changing risk appetite. In the week ending December 1, investors pulled nearly $4 billion from U.S. investment-grade bond funds, the biggest withdrawal since April 2020, according to Refinitiv Lipper. Junk funds bled roughly $2.6 billion. Blue-chip spreads are now wider on the year after narrowing to the lowest since 2007 over the summer.
Peter Chatwell, head of multi-asset strategy at Mizuho International, said that corporate credit is still in the crosshairs because of the fact that omicron fears are overblown or warranted. Easing worries would cause long-term Treasuries to yield higher credit, dragging down credit, while a worst-case scenario that leads to further lock-downs would hurt corporate debt, as well as erode corporate revenues.
Chatwell said that the trade here is to sell LQD and maybe sit on the cash for a while.
After some of the turbulence is worked through, Samana sees equities as the ultimate destination of portfolio managers, given that rates remain historically low.
Samana said that we think a lot of this consternation will be a mini tantrum. Given the low yields, equities will be the place to be again. None The Fall of a Russian Cyberexecutive Who Went Against the Kremlin