Corporate bond ETFs tumble, heading for worst day since March 2020 as inflation shows no sign of peaking

Funds designed to offer investors an easy way to trade in and out of US corporate bonds slumped on Monday as inflation fears gripped financial markets.

The largest U.S. corporate bond exchange-traded funds were on track for their worst one-day decline since spring 2020, as fears of the coronavirus swept financial markets, according to Dow Jones Market Data.

Selling first gained momentum on Friday after May’s CPI showed little hope of an abatement from the high cost of living in the US. Rents, gas and food prices all pushed up, shattering hopes of many investors, householders and even the White House that efforts to cool inflation from a 40-year high could help.

Shares in riskier high-yield, or “junk” bond ETFs, were down the most on Monday. Here’s the latest:

  • The iShares iBoxx $ High Yield Corporate Bond ETF HYG worth $12.5 billion,
    fell 3.2%.

  • The $8.1 billion SPDR Bloomberg High Yield Bond ETF JNK,
    Traded 3.4% lower.

  • For investment-grade bonds, the $32.8 billion iShares iBoxx $ Investment Grade Corporate Bond ETFLQD fell by 2.2%.

  • JNK and LQD were on course for their worst daily percentage declines since March 18, 2020 or two days earlier Sweeps of US imposed COVID-19 lockdownsaccording to Dow Jones market data.

  • HYG was on track for its worst daily decline since April 1, 2020.

  • All three ETFs posted their sharpest daily percentage declines since May 5 on Friday, according to Dow Jones Market Data.

ETFs are often the first thing investors sell for liquidity when markets get choppy, as their stocks trade on the fly like stocks, although the underlying bonds held by ETFs can take hours or days to trade longer will.

Major US stock indexes also fell on Monday, with the S&P 500 index SPX,
Testing Bear Market Territory, The Dow Jones Industrial Average DJIA,
of more than 600 points and the Nasdaq Composite Index COMP,
down 3.6%.

Read: Plunge puts the S&P 500 on course to enter a bear market: what investors need to know

talk of layoffs

“Last year, companies had tremendous pricing power,” Ellen Gaske, senior economist at PGIM Fixed Income, said over the phone, citing the flood of household savings that helped companies pass higher costs on to consumers, who often compete due to fewer goods faced disruptions in the supply chain.

But in recent months “you can see cracks,” Gaske said, even as company profits adjust to workers with paychecks resulting from higher costs for gas, groceries and more.

US companies, like many households, have emerged from the pandemic lockdowns in robust financial shape, with heaps of excess cash lying around in the face of ultra-low interest rates and huge aid from Washington and the Federal Reserve.

That’s now being reversed as household stimulus checks disappear and prices are skyrocketing on almost everything that has started to weigh on quarterly corporate earnings.

Related: Junk bonds show signs of liquidity tightening as S&P 500 narrowly avoids bear market territory

“For now, inflation is the ‘only mandate’ of the Fed and ECB, but we expect the employment side of the Fed’s mandate to re-enter deliberation function over the next few months as companies increasingly freeze hiring, with some lay off them,” Rick Rieder, BlackRock’s chief investment officer for global fixed income, said in emailed comments following the inflation report on Friday.

However, PGIM Fixed Income’s Gaske said looming cracks in corporate credit are likely to be offset by the overall strength of US budgets.

“There’s room for these cracks to appear and not derail the economy,” she said.

U.S. stocks also posted sharp declines on Friday, with the S&P 500 index SPX,
from 2.9%, the Dow Jones Industrial Average DJIA,
up 2.7% and the Nasdaq Composite Index COMP,
Discount of 3.5%, according to FactSet.

See: Why Ray Dalio’s Bridgewater started betting against US and European corporate bonds

Also read: These 19 big tech stocks are now down at least 60% from their 52-week highs Corporate bond ETFs tumble, heading for worst day since March 2020 as inflation shows no sign of peaking

Brian Lowry

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