Industry Updates

High yield ETFs post strong inflows as banking contagion subsides

Almost $600m flowed into two high yield BlackRock ETFs last week

Theo Andrew

Bonds stopwatch

High yield ETFs saw significant inflows last week as fears around contagion in the banking sector subside while fundamentals remain strong for the asset class.

Leading the way was the iShares € High Yield Corp Bond UCITS ETF (IHYG) which saw inflows of $354m in the week to 6 April, followed by the iShares $ High Yield Corp Bond UCITS ETF (SHYU) with inflows of $239m, according to data from ETFLogic.

The two ETFs have seen positive returns year to date, with IHYG up 2.9% while SHYU is up 2.8%.

David Crall, CIO of Nomura Corporate Research and Asset Management, said investors refocused on high yield’s attractive all-in carry, continued robust cash flow generation and a dearth of new debt supply.

“We remain on guard for signs of a resumption of banking troubles and continue to contemplate the impact of tighter credit conditions on economic growth but we believe that the high yield market’s 8.5% yield as of the end of March offers a compelling entry point for investors,” he said.

The impact of the banking crisis on high yield debt can be seen in its spreads over US Treasuries over the past month, widening by 100 basis points (bps) through to 24 March, before dropping to 460bps, 66bps down from their March peak.

Christian Nolting, global CIO at Deutsche Bank, said fundamentals for the asset class remained strong but were likely to weaken over the course of the year.

“The high yield fundamentals are likely to remain strong despite some expected deterioration during the year. Although higher than last year, supply is likely to remain lower than the past five-year average.

“Nevertheless, default rates are unlikely to stay at the benign levels seen last year and are expected to rise closer to their long-term averages. This should partially offset the recovery potential in spreads.”

It comes as investors anticipate the Federal Reserve to potentially pause or reverse its interest rate hiking cycle later this year.

The inflows have coincided with strong equity markets as investors continue to price in interest rate cuts by the Fed later in 2023 despite chair Jerome Powell stating it would not be doing so.

Recent US unemployment figures remained low last week, falling from 3.6% to 3.5%, making Fed cuts this year less likely as inflation remains sticky.

Despite this, there are signs the labour market is softening with job openings and unemployment claims much weaker than expected, while average earnings growth eased to 4.2% in March, down from 5.5% a year ago.

Rupert Thompson, chief economist at Kingswood, said the figures have helped contribute to the confusing backdrop facing investors.

“The market is currently pricing in a 70% chance US rates will be raised a further 0.25% in early May before cutting rates later in the year.”


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