(Bloomberg) -- Junk-bond investors are getting nervous as the financial markets sell-off spreads.
Investors pulled $5.4 billion of cash out of high-yield bond funds from Oct. 4 through Tuesday, JPMorgan Chase & Co wrote in a note Wednesday, citing Lipper data. That’s the biggest outflow for a similar period since a $6.3 billion drawdown in February, the second largest on record, according to the report.
Exchange-traded funds led the drain, with the SPDR Bloomberg Barclays High Yield Bond ETF, known as JNK, seeing the biggest withdrawal since January on Tuesday. The iShares iBoxx High Yield Corporate Bond ETF, known as HYG, last week got hit with a record single-day outflow. Both traded at their lowest since November 2016 Wednesday.
The flight out of the funds comes in the wake of Treasury yields surging to a seven-year high, which has helped push the Bloomberg Barclays US Corporate High Yield Bond Index down over the past four days. Yields on the benchmark index jumped to 6.50 percent, the highest in three months.
The pain was also felt in swaps Wednesday. The high-yield credit default swap index fell to the lowest since July 5 after the biggest decline in four months, data compiled by Bloomberg show.
“Corporate earnings will be a problem going forward,” said Noel Hebert, high-yield strategist at Bloomberg Intelligence. “With tailwinds gone and with headwinds like tariffs and full valuations already, high yield will be adversely impacted -- even with favorable technicals -- if equities get hit.”
ETF flows are noisy -- HYG enjoyed its biggest ever net inflow on Oct. 1 -- and some long-term investors ignore the data.
“The ETF flows are pretty volatile, with professional speculators contributing a lot of the volatility,” said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. “Those up and down swings have washed out over longer periods.”
The average junk bond yield is still low compared to recent history. A low default rate, high oil prices and steady U.S. economy support the case for a bull market.
“Forecasts are for default rates to be lower over the next 12 months than over the last 12 months, so investors are not too worried,” said Fridson.
However, high-yield spreads to Treasuries remain close to the tightest levels since the financial crisis, leaving little room for investors if fundamentals start to deteriorate. And if fears grow of an impending U.S. recession, portfolio managers will position accordingly.
Investment returns from junk bonds have started to dwindle, though CCC-rated debt remains the best-performing part of fixed income, with a year-to-date return of 5.64 percent.
©2018 Bloomberg L.P.
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