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HYG And U.S. High-Yield Market Outlook: Week Ending October 05, 2018

Published Thu, 11 Oct 2018 08:05:10 -0400 on Seeking Alpha

By Vladimir Nikulin
During the last week, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG) lost 1.32% (132 bps) due to the unexpected upward shift of the UST curve. There was an overall risk-off that affected not only high-yield bonds but also other instruments. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) decreased by 1.7%, S&P 500 (SPX) lost almost 1% last week, while the MSCI Emerging Markets ETF (EEM) lost almost 5% last week.
Figure 1. HYG ETF price dynamics during the week ending October 05

Source: Bloomberg Terminal
The underlying HYG portfolio was down 43 bps, while negative premium and other discrepancies added almost 90 bps, causing its price to decrease by 123 bps. The main reason for the significant discount to the underlying portfolio is a liquidity issue. There was significant outflow from high-yield bond ETFs, including HYG. Investors pulled a record $1.2 billion from the iShares iBoxx $ High Yield Corporate Bond ETF on Friday.
Figure 2. Contribution of sectors to changes in HYG over the week

Source: Bloomberg Terminal
The U.S. Treasury curve sharply shifted upward last week due to strong U.S. economic data. UST 10Y reached 3.23%, gaining 17 bps during the last week. It is a seven-year high. The 2-year U.S. bond yield increased to 2.83, the highest since 2008. The ISM data and job statistics were strong. The U.S. services sector expanded in September at its fastest pace on record. The ISM... Read more