Are Junk-Bond ETFs Sending Signals?

The proliferation of new junk bond ETFs in 2012 has been nothing short of impressive and two industry stalwarts, BlackRock's (NYSE: BLK) iShares and Van Eck Global's Market Vectors unit, have been leading the charge.

Large Redemption
But it's some of the more seasoned, high-yield bonds that are catching traders' eyes. Following an usual $725 million redemption last week in the $11.1 billion SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK), activity is picking up across the board in highly liquid, large asset junk bond ETFs.
 
While the redemption in JNK last week wasn't a true redemption because the seller allegedly took delivery of the actual bonds, unusual activity is permeating the high-yield bond ETF space today. JNK has already doubled its average daily volume.

Exit Move
"The selling we have seen today is not for receipt of bonds. This looks to be an exit trade from this asset class," ETF market maker WallachBeth Capital said in a note.
 
"Considering that Germany may throw in the towel on austerity, the U.S. could enter round three of quantitative easing, the banks are under increased regulatory pressure and still the lingering Greek issues, it isn't surprising that some might see higher rates on the horizon," Chris Hempstead, head of ETF execution services at WallachBeth, said in an interview with Benzinga. "That would not bode well for these funds."
 
JNK, HYG, along with the SPDR Barclays Capital High Yield Bond ETF (NYSE: SJNK), the Market Vectors High-Yield Municipal Bond ETF (NYSE: HYD) and the PowerShares Fundamental High Yield Corporate Bond ETF (NYSE: PHB) have seen inflows in excess of $6 billion this year and their AUM totals are double where they were in January 2011, according to WallachBeth data.
 
"Why are we focusing so much on the growth and AUM levels? We are watching closely to see how well the street can absorb a short term exit strategy from these funds. How would the fixed income world respond to a heavy and swift sell off in an ETF product space that has seen a steady inflow of assets for almost 18months?," Hempstead said.