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Market Extra: Junk-bond ETFs on pace for worst start to a year since 2016

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This article has been updated to correct the size of the LQD ETF.

Stocks aren’t the only part of Wall Street off to a tough start in 2022.

The biggest exchange-traded funds that trace debt issued by below investment-grade or “junk” rated U.S. companies also have been swept up in recent market turmoil as the Federal Reserve looks to pivot to fighting inflation and reining in easy financial conditions.

Shares of the sector’s largest $18.4 billion iShares iBoxx $ High Yield Corporate Bond ETF HYG, -0.15% fell about 0.4% on Monday, at last check, adding to its near 2.2% slide so far in January.

That puts HYG on pace for its worst start to a year since 2016, when it tumbled 3.1% over the first 15 trading days, according to Dow Jones Market data.

Likewise, the $9.3 billion SPDR Bloomberg High Yield Bond ETF JNK, -0.17% was down about 0.4% Monday, off 2.2% so far on the month and on pace for its worst start to a year since 2016, when it fell 3.6% over the first 15 trading days.

ETFs often are the first thing investors in corporate debt sell to gain liquidity when volatility flares up, largely because they trade in an instant, unlike the underlying corporate bonds they reference.

Volatility has been rattling both stocks and bonds as investors come to grips “with the Fed’s hawkish policy shift, still elevated inflation, and omicron’s dampening impact on economic activity,” according to John Hancock Investment Management’s co-chief investment strategists, Emily Roland and Matt Miskin, in a weekly client note.

But the team also see a “deepening bond bear market” as potentially a buying opportunity, particularly with the junk-bond spreads (see blue line in chart) still in the 3% range above the risk-free Treasury rate TMUBMUSD10Y, 1.751%, “suggesting little distress.”

Corporate bond spreads still low despite selloff
Federal Reserve data

Investment-grade bond spreads, or the premium investors earn to compensate for default risks, have been even lower, below 2%.

What’s more, the John Hancock team expects the “economy will be strong enough to continue growing even with a 2-3 rate increases,” although, “weaker growth to start the year likely diminishes some of the Fed hawkishness and could in fact be a good thing for the length of the cycle.”

See: As stock market plunges, a star money manager says the Fed is making a mistake by focusing on rates. Here’s what Scott Minerd says it should do instead.

The $36 billion iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, -0.23% was flat Monday, but off about 2.7% in January, putting it on pace for its worst start to a year since 2009, according to Dow Jones Market Data.

Like the S&P 500 index, it tracks a swath of U.S. investment-grade companies. As the stock market convulsed on Monday, the S&P 500 SPX, -0.56% was off 2.1% at last check, while the Dow Jones Industrial Average DJIA, -0.54% was down 1.8% and the tech-heavy Nasdaq Composite Index COMP, -0.24% was 2.2% lower.

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