Cooling Credit Appetite Spurs $1.3 Billion Exit from Giant ETFCooling Credit Appetite Spurs $1.3 Billion Exit from Giant ETF

Katherine Greifeld

(Bloomberg) -- After plowing cash into corporate bonds since March, exchange-traded fund investors are exiting en masse.

BlackRock Inc.’s $56 billion iShares iBoxx $ Investment Grade Corporate Bond (ticker LQD) -- the largest credit ETF -- posted an outflow of $1.3 billion on Tuesday, according to data compiled by Bloomberg. That’s the second-largest outflow for the fund, and comes just a month after LQD’s biggest withdrawal on record.

As coronavirus vaccine breakthroughs stoke risk appetite and boost inflation expectations, investors are likely setting their sights elsewhere, according to Academy Securities’ Peter Tchir. Not only have high-grade bonds rallied massively since the Federal Reserve’s backstop in March, but LQD’s 10-year duration -- a measure of sensitivity to rate changes -- is relatively high. That could bite the fund should price pressures materialize, he said.

“All-in yields are low, so as people start to believe in inflation and higher Treasury yields, they may be looking to reduce exposure to interest-rate-sensitive bonds,” said Tchir, head of macro strategy.

LQD has surged over 19% since March’s low, when the central bank announced it would buy corporate bonds and ETFs to smooth market functioning after the virus unleashed volatility. However, that rally has cooled -- LQD has dropped over 1% so far this month, while high-yield bonds have gained.