The cracks in equity markets and fixed income ETFs in the U.S. signal what may be next. $2.5 billion was invested in the iShares 20+ Year Treasury Bond ETF last week till Thursday, a record signaling investors fear about the growing omicron variant.
Sentiments for corporate debt sours as traders pulled out money for the third week from the high yield corporate ETF(HYG) of iSharesiBoxx as the short-term interest rate is at an all-time high on $ 38 billion invest Grade Corporate Bond ETF(LQD)
As per Bloomberg News, Fed Reserve chief Jerome Powell’s hawkish tilt and the coronavirus concern have sent worrying cross-asset signals to pull down equity markets. The transitory term used by the central bank chief for inflation has been replaced by suggestions of faster buyback of the bonds. The prospect of the Fed Reserve turning off the stimulus tap earlier than expected has sent fears across richly valued stocks and corporate credits that have thrived on a low-interest rate regime.
According to Sameer Samana, senior global market strategist with Wells Fargo Investment Institute, the caution on the part of investors towards credit is beginning to show considering the tight margins, omicron fears, and shift in central bank focus to inflation from the labor market.
The price of TLT jumped by 1.2% to $154.35 as it looks set for more cash inflows. Equities slumped, and S&P 500 fell by 0.8% Friday to closer for the second straight week, with tech stocks dragging the index down.
Also, the Goldman Sachs Group Inc. portfolio of non-profitable tech firms was down by 14 % over the last week, the worst since March 2020 as Cboe Volatility Index was the highest since January.
Investors pulled out around $ 1 billion from U.S. investment-grade bonds for the week ending Dec 1, reflecting their shifting risk appetite. According to Refinitiv Lipper, this withdrawal is the biggest since April 2020 as junk bonds also bled by $ 2.6 billion roughly. The blue chips spreads are broader now after narrowing to the lowest this summer since 2007.
Multi-asset strategy head at Mizuho International, Peter Chatwell feels irrespective of omicron being warranted or overblown; corporate credit will still be at crosshairs. The easing of coronavirus worries may lead to higher long-term Treasury yields, while in a worst-case scenario, further lockdowns would lead to worsening corporate revenues and also affecting corporate debt. “The strategy is to sell LQD and sit on cash for some time, “Chatwell said.
According to Samana, the equities will be the ultimate destination after the turbulence is overcome since the rates will continue to remain low.
