Credit “Death Spiral” Begins As Loan ETF Sees Massive Outflows, Liquidates Quality Paper
by Tyler Durden
ZeroHedge.com
Fri, 11/23/2018
One week after even the IMF joined the chorus of warnings sounding the alarm over the unconstrained, unregulated growth of leveraged loans, and which as of November included the Fed, BIS, JPMorgan, Guggenheim, Jeff Gundlach, Howard Marks and countless others, it appears that investors have finally also joined the bandwagon and are now fleeing an ETF tracking an index of low-grade debt as credit spreads blow out and cracks appear across virtually all credit products.
Not only has the $6.4 billion BKLN Senior Loan ETF seen seven straight days of outflows, with investors pulling $129 million on Wednesday alone and reducing the fund’s assets by 2% to the lowest level in more than two years, but over 800 million has been pulled in last current month, the biggest monthly outflow ever as investors are packing it in.
Year to date, the shares of the largest ETF backed by the risky debt are down 1.7% and reached their lowest since April 2016; the ETF’s underlying benchmark, the S&P/LSTA Leveraged Loan Index, has also been hit recently and is down 0.6% YTD.
What is more concerning is that what has been a mere trickle of selling appears to be evolving into a full blown liquidation: some 29 million shares of BKLN, worth $654 million, traded on Tuesday – mostly on the downside – resulting in a record trading day for the fund and more than eight times its average daily turnover for the past five years.
Speaking to Bloomberg, Yannis Couletsis, principal at Credence Capital Management said that “outflows for BKLN have most probably to do with the most recent deterioration of the credit environment,”; he ascribed the ETF’s drift on the deterioration of low-grade credit and “repricing of investors’ forecast regarding the path of Federal Reserve’s interest rate hikes.”
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