US bond ETF trading hit record volumes ahead of Fed rate decision
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Trading volumes for US bond exchange traded funds spiked to a record high on June 13 as soaring inflation prompted investors to bet on a more aggressive path for interest rate hikes by the Federal Reserve at its meeting later that week.
US fixed income ETF turnover hit $58bn on June 13, a one-day record which surpassed the $53bn of trading on the previous busiest session in March 2020 when financial markets went into freefall during the early stages of the coronavirus pandemic.
“The record volume is a sign that investors are increasingly using fixed income ETFs as their vehicle of choice during times of market stress,” said Todd Rosenbluth, head of research at VettaFi, a data provider.
Yields on two-year US Treasury bonds jumped 24 basis points on June 13 amid the trading frenzy. This took the rise in yields so far this year to 252bp, reflecting the shift in investors’ expectations about the extent of monetary tightening by the Fed and inflicting severe pain on bondholders.
BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF (HYG) registered $9bn worth of trades on June 13, more than double its average daily volume over the previous 20 trading days, according to the world’s largest asset manager.
HYG’s most direct competitor, State Street’s SPDR Bloomberg High Yield Bond ETF (JNK), also saw record volumes of $4bn on the same day.
“Trading volumes have increased across ETFs as markets have become more volatile. It reflects investors’ desire to source liquidity via ETFs as they adjust portfolios to the reality of an aggressive Fed,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors.
But large discrepancies also appeared between the prices of some fixed income ETFs and the value of their constituent bonds, echoing the price dislocations that occurred during March 2020.
HYG closed at a discount to its net asset value of 122 basis points on June 13, compared with an average closing premium of 11bp over the previous 12 months, according to BlackRock.
“Not every high-yield bond trades every day or with the same frequency as a fixed income ETF. So the net asset value of a bond can be more stale than the price of the ETF, particularly given the rapid changes in the bond market,” said Rosenbluth.
HYG’s trading volumes were equivalent to 65 per cent of all over-the-counter high yield trades on June 13, according to BlackRock.
It insisted that the divergence from NAV was a demonstration of the price discovery process unfolding via ETFs, the most liquid vehicles operating in fixed income markets. In a falling market, cash bonds, which typically trade less often, catch up at a later date with the lower pricing levels indicated by the ETF.
“Credit ETF prices are often a leading indicator for the [rest of the] bond market. In times of market stress, bond ETFs have consistently provided price discovery and the ability for investors to express their differing investment views in real time,” said Carolyn Weinberg, global head of product for iShares and index investments at BlackRock.
US-listed bond ETFs gathered net inflows of $34bn in May, their second highest monthly haul on record, according to State Street. But so far this month, investors have pulled $1.8bn from bond ETFs, it said.
Withdrawals from investment grade, high-yield and bank loan ETFs have reached a combined $6.4bn so far in June but these have been partially offset by positive inflows of $3.7bn into short-duration government bond ETFs, traditionally one of the safest corners of fixed income markets.
“The outflows coincided with weakness in credit markets with yields on high-yield bonds surpassing 8 per cent for the first time since March 2020,” said Bartolini.
Some observers fear that sharp price declines in fixed income ETFs could exacerbate a sell-off in the underlying cash bond market but several studies have dismissed these concerns.
Rosenbluth said that some ETF investors might have sold their holdings at a bigger discount to net asset value but they were still able to exit from their positions in a timely manner with limited costs by trading on an exchange.