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Hot money outflows from US-listed junk bond
during the fourth quarter have so far not been replicated in
Since October 1 the two largest US-listed high-yield bond
tracker funds, iShares' $ High Yield Corporate Bond Fund (NYSE
Arca:HYG) and State Street's SPDR Barclays High Yield Bond ETF
(NYSE Arca:JNK) have seen over $1.7 billion in outflows, as
investors cash in after a long period of price rises.
Even after the recent outflows, the two funds are still well up
for the year in terms of new assets. HYG has seen its share base
expand by 44% in 2012, while JNK is up 26%. The funds currently
have $16.1 billion and $11.8 billion in assets, respectively,
collectively almost 3% of a US junk bond market estimated at $10
trillion in size.
In Europe, however, assets in iShares' Markit iBoxx Euro High
Yield Bond ETF (LSE:IHYG), the region's largest junk bond index
tracker with €1.6 billion in assets, have so far held steady during
the latest market sell-off.
According to one market maker, there are substantial differences
between the US and European junk bond ETFs.
"The US products trade much more in tune with the overall
sentiment of the market," says Lee Williams, partner and head of
trading at Bluefin Holdings, a market maker. "And they can be seen
as a driver of the underlying junk bond market in the US," he
"But in Europe junk bond ETFs are not yet big enough to affect
the underlying markets," Williams told IndexUniverse.eu. "So even
though junk bond prices are off around 5% in the last week, you
haven't really seen that reflected in IHYG's asset base. And in
fact we're still seeing good demand from UK investors for
US high-yield ETFs are also much cheaper to trade than their
European equivalents, Williams pointed out, something that makes
them more susceptible to short-term hot money flows.
"Bid-offer spreads on the US-listed ETFs are ferociously tight,"
said Williams, "although the price of the ETFs will move around
with respect to the underlying net asset value (
). Sometimes ETFs will trade at a premium and sometimes at a
At the close of New York trading on Thursday iShares' website
reported that the price of HYG was at a 0.33 percent discount to
the fund's NAV, while SPDR reported JNK to have closed at a 0.47
percent discount. HYG traded at a premium of 1.38 percent to NAV as
recently as mid-September, a period when inflows to the fund were
"In Europe IHYG trades on-exchange at spreads of between 10-25
euro cents, around 10-20 times higher in percentage terms than for
HYG and JNK in the US," said Williams.
"But there may not be so much depth in the quote at the tightest
screen prices in the US," he continued. "There may only be 2000
shares to trade at the tightest, 1-2 basis point spread quoted in
the US market, whereas in Europe you can be confident of trading in
a €10 million lot on-screen if a 25 basis point spread is
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