High-yield bond exchange-traded funds (ETFs) and mutual funds suffered $2.7 billion worth of outflows in the week through March 8, the largest outflow since November, as oil price volatility and rising expectations that the Federal Reserve will soon hike interest rates have lowered demand for high-risk bonds, according to industry data reported by The Wall Street Journal.
Funds like iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and SPDR Barclays Capital High Yield Bond ETF (JNK), as well as companies that issue high-yield debt, could suffer additional challenges if investors keep pulling money out of funds that provide exposure to high-yield debt. While the former ETF lost roughly $1.8 billion during the week through March 9, according to data supplied by research firm XTF and reported on by the Journal, the latter experienced $536 million worth of outflows. (For more, see: Junk Bonds: Friend or Foe in 2017?)
Impact of Oil Prices
One major driver of this situation is the recent pullback in oil prices, which fell sharply during the week ending March 11, according to the Journal. The commodity suffered price declines amid concerns that U.S. production might once again impact supply-demand fundamentals.
All oil and energy producing companies, for example Exxon Mobil Corporation (XOM), Chevron Corporation (CVX) and BP PLC (BP), could see their bonds impacted by these trends, market expert Tenpao Lee told Investopedia. Oil companies have taken on significant debt by selling junk bonds, and if oil prices experience further declines, these businesses could go into default, said Lee, interim dean and professor of economics at Niagara University. (For related reading, see: What Determines Oil Prices?)
Many Industries Vulnerable
Since energy and mining companies make up a disproportionate share of companies with credit ratings below investment grade, their plight could have an outsized impact on the junk bond market, the Journal reported. While the energy industry in particular could be impacted should demand for junk bonds ebb further, several other sectors—notably, high technology and biotechnology—could suffer, said Lee.