This got a fair amount of attention this week: Junk bond ETFs totally cratered (before rebounding a bit on Friday).
Obviously there’s a basic connection to the “risk off” tone to the market, but as Randall Forsyth at Barron’s notes, the magnitude of the selloff in the ETF has been much more dramatic than the magnitude of selling in actual junk bonds themselves. The difference is about 10-to-1!
One possibility put forth: ETFs like JNK are much more liquid than actual junk bonds, and so this huge selling actually represents junk bond investors selling the ETFs by proxy, because they can’t get a decent bid on what they’re holding.
If you buy the idea that credit markets are somehow “smarter” than other markets, and you believe that real money credit holders are rushing for the doors with these ETF shorts, watch out.
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