ETFs Playing Bigger Role in Junk-Bond Market

Funds are poised to overtake credit derivatives as method of speculating on high-yield debt.

Exchange-traded funds are poised to overtake credit derivatives by year-end as a way to speculate on junk bonds.

The value of corporate securities held by the five-largest junk ETFs almost doubled in the past year, to a record $31.4 billion, while the net amount of protection bought or sold on the debt using the two current credit-default swaps indexes declined 3 percent to $35 billion, data compiled by Bloomberg show. The ETFs are growing at an average 5.2 percent monthly pace this year, which would put assets at more than $36.5 billion by Dec. 31.

Nordea, Getty

Elsewhere in credit markets, Nordea Bank AB, the Nordic region’s largest lender, is planning its first offering in more than 16 months of dollar-denominated, 10-year bonds. Getty Images Inc., the photo archive, is said to be seeking $1.85 billion in loans to back its buyout by Carlyle Group LP.

‘Meant to Work’

Trading volumes in the current version of the Markit CDX high-yield credit swaps index have declined 20.2 percent from last year, when an escalating European debt crisis sent debt investors rushing to protect against losses, Barclays analysts led by Bradley Rogoff wrote in a Sept. 14 report. The firm cited data from the Depository Trust & Clearing Corp., which runs a central credit-swaps repository.

Pitched ‘A Lot’

“I’ve definitely had it pitched to me a lot” as an alternative to holding cash reserves, Nancy Davis, director of derivatives at New York-based AllianceBernstein LP, which manages $230 billion of fixed-income assets, said of high-yield bond ETFs in a telephone interview.

London Whale

Investors seeking a hedge against junk-bond losses also were pushed to ETFs earlier this year after trades by a JPMorgan trader distorted prices in credit-swaps indexes.

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