Funds designed to give investors an easy way to trade in and out of U.S. corporate debt are getting hit by selling on Friday.
The biggest exchange-traded funds for U.S. corporate debt were down sharply on Friday, heading for their worst daily fall in about a month, after the May consumer-price index showed little hope of high costs of living easing in the U.S.
Rents, gas and food prices all pushed higher in May, dashing hopes by many investors, households and even the White House that efforts to cool inflation from a 40-year high already might be helping.
Shares of riskier high-yield, or “junk,” bond ETFs were down dramatically Friday. Here’s an overview:
- The $12.9 billion iShares iBoxx $ High Yield Corporate Bond ETF HYG, -1.66% was off 1.6%.
- The $8.1 billion SPDR Bloomberg High Yield Bond ETF JNK, -1.70% was also down, falling 1.7%.
- For investment-grade debt, the $32.8 billion iShares iBoxx $ Investment Grade Corporate Bond ETFLQD was down 0.9%.
- All three were on pace for the worst daily drops since May 5, according to Dow Jones Market Data.
- At the session lows, JNK and HYG were headed for their worst daily drop since June 11, 2020.
ETFs often are the first thing investors sell for liquidity when markets get choppy, since their shares trade in a flash, like stocks, even though underlying bonds held by ETFs can take hours, days to longer trade.
Talk of layoffs
“Last year, companies had tremendous pricing power,” said Ellen Gaske, lead economist at PGIM fixed income, by phone, noting the glut of household savings that helped corporations pass on higher costs to consumers, who often were competing for fewer goods due to supply-chain disruptions.
But in the past few months, “you can see cracks appearing,” Gaske said, including as business profits adjust to workers with paychecks stretched from higher costs for gas, groceries and more.
U.S. companies, like many households, emerged from pandemic lockdowns in robust financial shape, with heaps of spare cash lying around, given ultralow interest rates and the huge amount of aid from Washington and the Federal Reserve.
That’s now being reversed as household stimulus checks vanish and prices for nearly everything soar, which has started to pressure quarterly corporate earnings.
Related: Junk bonds are showing signs of liquidity strains as the S&P 500 narrowly avoids bear market territory
“For now, inflation is the ‘singular mandate” of the Fed, and the ECB, but over the next few months we would anticipate that the employment side of the Fed’s mandate will re-enter the consideration-function as companies are increasingly freezing hiring, with a number of them executing layoffs,” said Rick Rieder, BlackRock’s chief investment officer of global fixed income, on Friday in emailed comments, after the inflation report.
Gaske at PGIM, however, said emerging cracks in corporate credit likely will be offset by the overall strength of U.S. households.
“There’s room for those cracks to appear and not to derail the economy,” she said.
U.S. stocks also were sharply lower Friday, with the S&P 500 index SPX, -2.13% off 2.5%, the Dow Jones Industrial Average DJIA, -1.96% down 2.3% and the Nasdaq Composite Index COMP, -2.83% off 3.2%, according to FactSet.
See: Why Ray Dalio’s Bridgewater started betting against U.S. and European corporate bonds
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