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Friday, May 25, 2012

Redemptions Wallop a Junk Bond ETF

News summary by MFWire's editors

Massive redemptions from SPDR Barclays Capital High Yield Bond ETF has left investors really nervous on the safety of the instrument, writes Katy Burne for Dow Jones Newswires. Yet Brendan Conway of Barron's argues that "customized in-kind redemptions" are "not so unusual after all."

Barron's cites Eric Lichtenstein of Knight Capital Group and Loc Vukhac of BlackRock's iShares asset management and hedge fund group, who describe such redemptions as a way for investor to get "ahold of the underlying bonds discreetly." Vukhac insisted that this was "not State Street-specific."

Dow Jones writes that this redemptions happened after a State Street Global Advisors run-mysterious trade took place before J.P. Morgan announced the $2 billion loss in derivatives trade.

It also happened the same week that a high yield Invesco PoweShares ETF saw a record of $115 million in inflow for the week which raised its assets by 25 percent.

A total of $869 million of assets in the week through May 16 or 8.1 percent was lost by the Barclays ETF.

Brian Hessel, Global Credit Advisers managing director, said:

"We've been concerned for a while now that there's been so much money coming into ETFs and creating excess demand for junk bonds that one day the trend might reverse. We don't know if this is the beginning of a great reversal, or an investor or two taking some chips off the table, but we have been cautious for a a few weeks now about valuations."

Hessel said the price swings that were created by the withdrawals can also mean that bonds were sold by the firm in big discounts. 

Edited by: HFD

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