While high-yield bond ETFs have been under massive pressure, some have argued that this carnage has yet to really hit the underlying cash bond market (since the flows are more exchanges between two parties as opposed to redeeming ETFs for actual bonds). It would appear that pattern is changing as today the bloodbath in ETFs is spilling directly into the corporate bond markets themselves with every sector in investment grade and high yield deep in the red.
As Bloomberg noted Friday,
HYG saw outflows of $560 million on Friday, its third worst day ever. But this was only 13 percent of its total $4.3 billion in trading volume, meaning 87 percent of the trading didn’t involve touching the underlying bonds. To put it another way, 87 percent of the trading was between two parties over an exchange and/or through a market-maker taking the other side. Some 13 percent, however, involved the redemption of HYG shares to the ETF's provider, Blackrock, in exchange for a basket of junk bonds.
But today, the pressure is really starting to hit the underlying bonds...
Now the vicious cycle begins... and as we have already seen - the contagion is spreading.
Charts: Bloomberg