Two Giant Credit ETFs Hit by $2 Billion Exit on Hawkish Fed Bets

A pair of exchange-traded funds tracking corporate credit saw a nearly $2 billion flight after data underscoring jobs strength solidified bets the Federal Reserve will resume its interest-rate hikes.

The $13 billion iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) saw outflows to the tune of $1.13 billion in the latest session for which those figures are available. That’s the biggest withdrawal since March, according to data compiled by Bloomberg. Investors also pulled some $760 million from the $35.5 billion iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

HYG Outflow Most Since March | Junk bond ETF saw net outflows of $664.3 million in the past year

Markets were shaken Thursday after stronger-than-expected private payrolls data bolstered bets the Fed is on track to tighten this month and mull another hike as soon as September. Swap traders are almost fully pricing in a quarter-point increase on July 26, and about 40% odds of another one by year-end.

“Outflows from credit make sense based on the market’s read that stronger job growth will result in more Fed hikes,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “Spreads are already quite tight, and now you have increased pressure from higher rates that could add further stress to companies at a time when lower quality companies are starting to struggle a bit.”

Corporate credit has failed to live up to lofty expectations of double-digit returns so far this year, fueling a string of bearish bets into the second half of 2023.